Long/Short, Long Extension, and Market-Neutral Portfolio Construction

CFA Level III Equities
#1
  1. Can someone pls explain me the following:
  • The capacity and scalability of a long-only strategy is set by the liquidity of the underlying securities. Capacity of short-selling strategies is set by the availability of securities to borrow to facilitate short-selling. This means the capacity of long/short strategies is likely to be lower than for long-only strategies, particularly those large-cap funds that face few long-only capacity issues.

I get it that with short selling, we need to find the shares to borrow and sell. But what do we mean by capacity in this case? What does it mean the capacity of long/short strategies is likely to be lower than for long only? I don’t seem to grasp the idea behind capacity and scalability for long-only strategies.

  1. What is the actual difference between long/short strategy vs long extension? To me, they sound the same.
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#2

what does this particular sentence mean " the capacity of long/short strategies is likely to be lower than for long-only strategies, particularly those large-cap funds that face few long-only capacity issues."

#3

Fewer shares are available for borrowing than are available for purchase.

Long extension is a variety of long/short. Long/short can be long-biased, short-biased, or neutral.

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#4

i think I got it. Its because when it comes to selling shares, its always hard to find shares to borrow and also the cost of borrowing makes it difficult too.

#5

Bingo!

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