Performance, Benefits and Risks of Active-extension Strategies:

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How are long-only managers’ performance limited by the fact that they are constrained to no short selling? Applying a bootstrap statistical technique, we analyze the performance of active-extension strategies using 25 Fama-French portfolios formed on size and book-to-market. We show that a pool of active-extension portfolios outperform long-only portfolios, when the same alpha model is used. Active-extension is defined as an investment strategy that allows for both long and short positions in the portfolio, with a gross exposure above 100% of NAV, while maintaining a beta of one. The paper gathers and assesses previous research on the benefits and shortcoming of active-extension strategies. It also compares active-extension strategies to other investment vehicles. Our study shows that a pool of active-extension 130/30 portfolios outperform a pool of long-only portfolio, over the full sample period from 1927-2007. Looking at shorter ten-year periods, the active-extension portfolios predominantly outperform the long-only portfolios (i.e. have a better risk-adjusted return). The results are especially robust for the second half of the 1927-2007 period. Further, we show that with...