Short extension strategy

CFA Level III
#1

Why short extension strategy can obtain alpha from different markets, while long/short strategy can’t?

#2

I think you can the main difference between the two is that

Long-Short strategy (when equitized) gives you the chance to get alpha from a risk source and Beta from another risk source.

Short-Extension strategy gains Beta & Alpha from the same risk source.

#3

Can gain the alpha and beta exposure from the same source. Short extension strategies are free to short any overvalued security they want, and invest the proceeds in any undervalued/neutral security they want. It can also be used to maintain the same systematic exposure overall.

#4

LONG-SHORT INVESTING

Gives you the chance to get alpha & beta from same risk source to but that it doesn’t seem to be the spirit of the curriculum when they refer to Long-short investing and the “portable alpha” which refers to a "variety of different systematic (beta) risk exposures" and not necessarily the one referring to your alpha.

SHORT-EXTENSION

the curriculum clearly refers to the disadvantage of same risk source between Alpha & Beta.

thanks

#5

I don’t quite get what you mean.

Short extension strategies simply capitalize on overvalued securities rather than only decreasing their weight (if available) by shorting the security and reinvesting the proceeds within the same beta-target, usually. Of course, the factor risk from the readjustment needs to be accounted for. They are both long/short strategies, and they both attempt to neutralize the impact on the portfolio’s systematic risk (as per curriculum). The difference is short extension is a TAA with a wider range of investment choices focusing on relative value in any asset class, even in different markets, while L/S is a market neutral single investment in close peers, with equity future(s) to potentially provide systematic exposure.

L/S should be the broader type of investment that includes short-extensions.

#6

Sorry if I haven’t been able to make myself clear on this, from long to short :

Market neutral : BETA= 0

short extension : BETA =1

When you say that short-extension aims to neutralize systematic risk doesn’t sound that correct

other discussions about :

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91126223

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91156777

Hope it helps,

#7

It does so within the extension transaction.

If your portfolio beta is 1, then the short extension is offset by a long position using the proceeds with the same systematic exposure, thus neutralizing the effect on beta. However, with L/S, the net effect is almost always zero, but with the SE, it can be adjusted to maintain the same systematic risk, but this is not the main purpose of the strategy.