McGraw-Hill

286 Expanding Opportunities
such as the one discussed previously, portfolio risk and return are
solely reflective of the individual stocks selected for inclusion; the
return and risk of the market do not enter the picture. The portfolio
can be "equitized" to capture market return and risk, however, by
purchasing stock index futures. The equitized long-short portfolio
will reflect the equity market's performance in addition to the performance
of the long-short portfolio. Choice of other available derivatives
can provide the long-short portfolio's return from securi
selection in combination with exposure to other asset classes.
Derivatives, including stock index futures, bond futures, and
customized swaps, can be used in conjunction with long-short or
long-only portfolios to "transport" the performance of specific
managers to virtually any desired asset class. This is a relatively
new area of investment engineering, but one that may revolutionize
investing in much the same way that the growth in indexed and
quantitative management has over the last few decades. The chapters
in this last section provide a detailed at look these leading-edge
ideas.
The first chapter, "Long/Short Equity Investing" (Journal of
Portfolio Management, Fall 1993 and, in translation, Security Analysts
Journal ofJapan, March 1994) considers the basics of long-short portfolio
construction and provides charts that illustrate the rewards. It
also addresses some commonly voiced concerns, including the beliefs
that shorting is "too risky" or even "un-American" and "bad
for the economy." "20 Myths about Long-Short" (Financial Analysts
Journal, September/October 1996) extends this discussion, drawing
some vital distinctions between perceptions and realities and debunking
some popular misconceptions about long-short.
"TheLongandShortonLong-Short" (Journal of Investing,
Spring 1997) covers the proper construction of market-neutral longshort
portfolios, explains their benefits over long-only portfolios,
and demonstrates how the investor can add back exposure to the
equity market's return (and risk) via derivatives. In particular, this
article emphasizes our findings on the .importance of integrated
portfolio construction. The real benefits of long-short arise from an
integrated optimization that considers the candidates for purchase
and the candidates for short sale simultaneously, and in result a single
portfolio in which the contributions of the long positions and
those of the short positions are.inextricably linked.