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Lecture 37 : Long Short Equity
BIBANI Iheb
posted

Hi guys ,

There is something that I didn't understand in the lecture 37 treating about the long short equity strategy.

Actually , Long and Short Baskets

"If you are ranking m equities, have d dollars to invest, and your total target number of positions to hold is 2n , then the long and short baskets are created as follows. For each equity in spots 1,…,n in the ranking, sell (1/2n)∗d dollars of that equity. For each equity in spots m−n,…,m in the ranking, buy (1/2n)∗d dollars of that equity"

Seriously , I didn't understand this paragraph neither the choice of the baskets and how we find the number of the baskets..

I guess an explanation with an example will help me a lot

Thanks in advance !

3 responses
BIBANI Iheb

Okay ! I' ve understood .

Actually , "d" is the total amount that you're going to invest.

"2n" is the total position to hold which means what you hold after shorting a basket of equities in one hand and long another basket of equities in the other hand.

Doing "(1/2n)*d" is the amount of dollars that you invested on average in an equity

Hope that I'm correct and clear for those who are reading

Regards
Iheb

Tentor Testivis

About right. I've reformulated the part of this totorial as:
Short the worst and long the best ranked assets, the number of longs is the same as the number of shorts and each asset gets the same position size.

BIBANI Iheb

yes , I got this also but didn't mention it . It's super important since it allows us to be MARKET NEUTRAL .

Hedge funds however seem to get more long position than short and it's logical because what they are doing is that they take more risk while hedging it with the short positions if I do understand.

Thanks Tentor for your answer :)

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