Long/short strategy

Exploring Long-Short strategy

26 Aug 2020

Key Takeaways: Enabling short sales in this investment framework underperforms the benchmark configuration in a risk-unadjusted sense. Our strategy's performance with the alternative configuration will need to be optimized by hyper-tuning several parameters. Additional considerations need to be made for the investable universe especially given the structural and secular tailwinds for the timeframe explored. Shorting universe of winners is a poor exercise as most have better than average growth prospects. Implementing trailing stops or developing an event-driven framework might yield better performance.

Since day one our focus has been on seeking healthy returns with sensible risk management. We aim to achieve this via thorough in-depth analysis and investing in good publicly traded companies at a decent price in hopes of future appreciation. The investing world calls this approach "long-only", in contrast to "short" strategies where investors borrow and sell shares of crappy firms trading at high prices in expectation that their prices fall so that the investors can return the borrowed shares and pocket the difference.

Since our early days, we focused on tuning our approach for long-only investing and imposed a constraint to never short. Recently we have started to explore what happens if allow both long and short positions ("long-short"). Our findings using our backtesting framework, show that a naive long-short strategy (unsurprisingly) underperforms our long-only strategy. This is common sense to us. Like a newborn puppy, the new approach needs months of works to tune and refine. Even we (as dog-parents) also have to be re-trained to search for "losers" to short, and not just "winners". Needless to say, we have our work cut out for us and it might take another year before we go live with this (if at all). Read more here.

Xantos Labs ("Xantos", "XL") is an SEC-registered investment adviser.

The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. The views expressed here are those of the authors and not necessarily those of Xantos. Charts and graphs provided herein are for illustrative purposes only. Nothing contained herein constitutes investment, legal, tax, or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. XL and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this document.

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Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight. Hypothetical performance results are presented for illustrative purposes only.

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