The Long/Short Toolbox
Long-only portfolios are by definition correlated to the market. Introducing a short component enables managers to engineer the type of performance they want to deliver. We will make long/short portfolio management accessible to all dedicated market participants in this chapter.
Creating a long/short portfolio requires the consolidation of two relative portfolios: a long and a short book. The transition from a long-only or absolute long/short into a relative strength-long/short portfolio can be quite disconcerting at first. There are lots of moving parts. An effective way to manage this transition is to begin with the objectives in mind: liquidity, correlation, volatility, and performance. Then, concentrate on a handful of variables that have the highest impact on these objectives: gross and net exposure, net beta, and concentration, which make up your investment toolbox when constructing your strategy.
The following table indicates which of our objectives...
