McGraw-Hill

318 Expanding Opportunities
the $4.50 of additional collateral that must be posted with the securities‘
lenders. Adding the remaining $0.50 to the liquidity buffer increases
it to $10.50, or 10 percent of the new portfolio capital value
of $105.
Myth 16. Long-short management costs are high relative to long-only.
If one considers management fees per dollar of securities positions,
rather than per dollar of capital, there is not much difference between
long-short and long-only fees. Furthermore, management fees
per active dollar managed may be lower with longshort than with
long-only management. Long-only portfolios contain an often substantial
“hidden passive” element.. Active long-only positions consist
of only those portions of the portfolio that represent overweights or
underweights relative to the market or other benchmark index; a
proportion of the portfolio may consist of index weights, which are
sentially passive. To the extent that a long-only manager‘s is based fee
on the total investment rather than just the active over- and
underweightings, the long-only fee per active dollar managed be may
much higher than that of longshort a manager.
Myth 17. The long-short portfolio does not receive use of the cash proceedsfrom
the shares sold short.
What may be true for retail investors is not true for institutions.
Today, institutional investors, although they do not have use of the
cash proceeds from short sales, do receive a large of portion the interest
on the cash. Although the prime broker and securities’ the lenders
extract a payment securing for and providing the shares, the is not cost
inordinately large. Incurred as a haircut on the interest, the cost averages
25 to 30 basis points annually (more for harder-to-borrow sha
To this cost should be added any opportunity costs incurred because
shares are not available for borrowing (or shares already shorted are
called in by the lender are and not replaceable) or because uptick rules
delay or prevent execution of short sales. (Uptick rules can be circumvented
by use of prinapal packages or options, but former the are expensive
and the latter are subject to limited availability and offer
limited profit potential.) These incremental costs of longshort management
can be, and often are, outweighed by the flexibility benefits
offered by longshort construction.
Myth 18. Long-short portfolios are not prudent investments.
The responsible use of long-short investment strategies is consistent
with the prudence and diversification requirements of