Factor Investing: Long-Only versus Long-Short

19 Pages Posted: 29 Mar 2014

See all articles by Joop Huij

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Simon Lansdorp

Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

David Blitz

Robeco Quantitative Investments

Pim van Vliet

Robeco Quantitative Investments

Date Written: March 28, 2014

Abstract

Various studies recommend investing in factor premiums beyond the classic market risk premium, such as the small-cap, value, momentum, and low-volatility premiums. It is unclear, however, if factor investing can best be implemented using a long-only or a long-short approach. We empirically compare both approaches and find that although a long-short approach is superior theoretically, a long-only approach seems to be the preferred alternative in most scenarios, after accounting for practical issues such as benchmark restrictions, implementation costs and factor decay. In fact, we show that costs and decay may completely offset the value added of a long-short implementation. We conclude that investors should carefully consider the pros and cons of long-only and long-short approaches when implementing factor investing. The framework described in this paper is intended to help investors make that decision.

Suggested Citation

Huij, Joop and Lansdorp, Simon and Blitz, David and van Vliet, Pim, Factor Investing: Long-Only versus Long-Short (March 28, 2014). Available at SSRN: https://ssrn.com/abstract=2417221 or http://dx.doi.org/10.2139/ssrn.2417221

Joop Huij (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Simon Lansdorp

Robeco Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Pim Van Vliet

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG
Netherlands

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