Long-short portfolio management: An Integrated approach - The real benefits of long-short are released only by an integrated portfolio optimization.

With the freedom to sell short, an investor can benefit from stocks with ne gative expected returns as well as from those with positive expected return s. The authors explain that the benefits of combining short positions with long positions in a portfolio context, however, depend critically on the wa y the portfolio is constructed. Only an integrated optimization that consid ers the expected returns, risks, and correlations of all securities simulta neously can maximize the investor's ability to trade off risk and return fo r the best possible performance. This holds true whether or not the long-sh ort portfolio is managed relative to an underlying asset class benchmark. D espite the incremental costs associated with shorting, the authors argue th at a long-short portfolio, with its enhanced flexibility, can be expected t o perform better than a long-only portfolio based on the same set of insigh ts.