Assessing the Cost of Accounting-Based Long-Short Trades: Should You Invest a Billion Dollars in an Academic Strategy?

Assessing the Cost of Accounting-Based Long-Short Trades: Should You Invest a Billion Dollars in an Academic Strategy?

William H. Beaver 

Stanford University

Maureen F. McNichols 

Stanford University

Richard A. Price III

Utah State University – Huntsman School of Business
February 26, 2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 177

The bulk of the academic literature studying market efficiency assumes that investors are fully diversified and that they can construct long-short portfolios at zero cost. We relax these assumptions and under more realistic assumptions examine the attractiveness of long-short strategies as stand-alone investments and as a part of a diversified portfolio. We highlight costs and considerations unique to our setting which include: the relevance of idiosyncratic risk and nontrivial downside risk; the generally positive short position returns which reduce long-short strategy returns; the cost of capital; financing costs; and rebates received on the short portfolio. Our analysis reveals that as stand-alone investments, long-short strategies are not preferable over the market. However, long-short strategies do contribute significantly to the performance of an overall diversified portfolio.



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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