Short positions do not add value to factor investing strategies

Short positions do not add value to factor investing strategies

09-12-2019 | リサーチ

Common wisdom among academics and investors has it that factors are best harvested using both long and short positions. But Robeco’s empirical analysis challenges this assertion.

  • David Blitz
    Chief Researcher
  • Pim  van Vliet, PhD
    van Vliet, PhD
    Portfolio Manager and Co-Head of Robeco’s Quantitative Equities department
  • Guido  Baltussen
    Head of Factor Investing

Speed read

  • Most added value comes from the long legs of equity factor strategies
  • Long legs of factors offer more diversification than short legs
  • Findings do not account for the higher costs associated with short positions

In a recent research paper,1  we broke down common equity factor strategies into their long and short legs, in order to critically assess the added value of short positions in harvesting equity factors such as value, momentum and low risk. We found that, contrary to general consensus, most of the added value from these factor strategies tends to come from the long legs.

Moreover, our research showed that the long legs of factors offer more diversification than the short ones and that the performance of the shorts is generally subsumed by the longs. In other words, equity factor premiums can be more efficiently harvested by dropping short positions and focusing only on the long ones.

These results held steady in a series of robustness checks. They hold across large and small caps. They are robust over time and across international equity markets, and cannot be attributed to differences in tail risk. What’s more, our findings do not even account for the substantially higher implementation costs implied by short positions compared to long ones. 

Equity factor premiums can be more efficiently harvested by dropping short positions

Finally, our research also challenges recent claims that the value and low risk factors are subsumed by the new Fama-French factors, as this hypothesis holds for the short legs of these factors but breaks down for the long ones. Altogether, our study shows that long legs of factor portfolios are crucial for understanding factor premiums and building efficient factor portfolios.

Read the related ‘When equity factors drop their shorts’ research paper on SSRN.

1Blitz, D. C., Baltussen, G. and Van Vliet, P., 2019, ‘When equity factors drop their shorts’, working paper.


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