The article “Why long/short attribution is difficult” (Nov. 26, Portfolio Management) asserts that long-short attribution is virtually impossible because of the vagaries of short investing.
You can't benchmark shorts.
In a more simplified view of long-short investing, you don't care about benchmarks, long or short. All you care about is that the longs beat the shorts, so attribution analysis should focus on why the longs did or didn't beat the shorts. It's that simple.
This can be accomplished by making the short portfolio the benchmark in traditional attribution, and that will reveal the effects of sector, style and country differences, as well as stock selection differences. Add to these insights the effects of directional bets and leverage, and, voila, you have long-short attribution made easy.
So for example you can see that (1) many market-neutral strategies are long value and short growth, and (2) that this style bet matters although it is not skill, and (3) sources of value add beyond that style bet. You don't need to pay 2-and-20 to go long value and short growth — that's very simple with exchange-traded funds.
Long-short attribution reveals success or failure beyond the simple do-it-yourself alternative.
Ronald Surz
President, PPCA Inc. and
Target Date Solutions
San Clemente, Calif.
