Amid volatile equity markets, investors are searching for ways to increase alpha while taking limited risk, meaning that short extension strategies are becoming increasingly popular as core portfolio allocations.  These strategies can deliver alpha, but success depends on the knowledge and approach of the individual manager, according to research byCredit Suisse.

Short extension strategies aim to profit from both a manager’s positive and negative views, and are otherwise known as 130/30 strategies.  Within this strategy the manager shorts 30 per cent of the portfolio, using the proceeds to fund an additional 30 per cent long position - resulting in a 130 per cent long and 30 per cent short portfolio with a net neutral exposure to the market.

In its research paper, "Short Extension: Capitalizing on Both Sides of the Market", Credit Suisse concluded that quantitative managers are particularly well-suited to implement 130/30 strategies as they are able to screen thousands of stocks on a daily basis, using systematic, research-driven models.  Having these detailed opinions on a large number of stocks allow quantitative managers to draw on superior intelligence when it comes to shorting.

However there are sometimes doubts as to the ability of traditional long-only managers to short successfully.  In line with this, Credit Suisse found that it is more difficult for a traditional long-only manager to meaningfully express a negative view on a given stock, as the manager is limited by the constituent index weights: only 3 per cent of stocks in the S&P 500 have index weights of 1 per cent or higher.

But according to the research, managers can improve their success rate by using a disciplined process that seeks to provide consistent, incremental outperformance of a benchmark.

Credit Suisse’s Quantitative Equities Group is headed by Jordan Low and as of 31 December 2008 managed approximately $3.6 billion in assets globally across a number of strategies.