THE EFFICIENT FRONTIER OF LONG-SHORT PORTFOLIOS

Abstract

Long-short strategies are now frequently implemented especially by hedge fund managers, or simply by active equity managers. Nevertheless, in the literature, the superiority of long-short strategies on long-only strategies still remains a debated point. A comparison of these strategies requires an efficient-frontier analysis. However such analysis to be relevant must integrate the specific regulation on long-short portfolios which exists on all stock markets. This paper studies the efficient frontier of long-short portfolios taking into account the regulatory constraints. A numerical resolution is proposed using the American regulations. A comparison with leveraged and unleveraged long-only strategies is presented showing the potential benefits of long-short investing.