A position with market neutral long-short strategy…
The answers states that the short side alpha is likely the larger of the two. Many investors look for cheap stocks in which to take long positions, but comparatively few look for expensive stock to stock…
I still don’t understand why short side alpha would be larger? I always thought the short side’s max gain is hte price of the security while the long side is unlimited, right?
Thank you!
Ya but short side is more informationally inefficient so to speak in theory. Obviously your logic is correct if you can theoretically find a stock that will go up over a short time horizon infinitely. Yes, it has an asymmetric payoff and can up infinite vs a short side transaction. But they refer to exploiting short term market inefficiencies where the short side is easier to exploit.
I guess to reiterate what googs1484 said, there is more opportunity to exploit informational inefficiencies and hence generate alpha on the short side. How many sell analyst ever issue sell ratings or cover companies that they think will perform poorly? How many company managers come out and say “Hey guys, my company is rubbish, I think you should short it.” I am sure you get the idea.
Great to know! Thank you both!
You’re very welcome dududu100