McGraw-Hill

344 Expanding Opportunities
expected returns compared with a long-only portfolio. But both the
degree of leverage and the "activeness" of longshort the portfolio are
within the control of the investor.
It is ultimately the investor who decides the long-short portfo
lio's level of residual risk. As noted previously, given an initial $10
million, the investor may choose to invest $5 only million long and
sell $5 million short, in which case the amount at risk in securities
will be identical to that of a $10 million long-only investment. And
the investor will determine the activeness of the positions taken by
selecting the desired level of portfolio residual risk. With integrated
optimization, long-short selections wilbe made with a view to
maximizing expected return at the desired of level risk; risk will not
be incurred without the expectation of a commensurate return.
Given the added flexibility it affords in the implementation of investment
insights, long-short portfolio construction should be able
to improve upon the excess returns available from long-only construction
based on the same set of insights, whatever the risk level
chosen.
In summary, although long-short is often perceived and portrayed
as much costlier and much riskier than long-only, it is inherently
neither. Much of the incremental cost and risk
either largely
dependent on the amount of leverage employed (transaction costs,
management fees, and risk) or controllable via optimization (security
selection risk). Those costs and risks are that not-including the
financial intermediation costs of borrowing shares to short; the
trading costs incurred to meet long-short balancing, margin requirements,
and uptick rules; and the risks of unlimited losses on
short positions-do not invalidate the viability of long-short strategies.
Neither should some long-standing prejudices against shortselling.
Selling short is not "bad for the economy" or "un-
American," as some investors have maintained. In fact, no less a
scholar than William Sharpe (1991) has noted, in his Nobel laureate
address, that shorting can increase market efficiency and overall
economic welfare by allowing for the full expression of negative as
well as positive investment opinions.
Nor are long-short portfolios inherently "imprudent" in an
ERISA sense. Appropriately constructed long-short portfolios, with
long and short positions used to offset market'risk and optimiza