Long-Short Portfolio

Long-short strategies are one of the most successful tools, applied by hedge funds manager. One under-evaluated stock is bought (long position) and an over-evaluated stock is sold (short position) at the same time. After a short term, when the values of the stocks are as expected, profit can be realized by a closing transaction. The possibility to find first obvious overand underevaluated stocks depends on the number of participants in this markets. While the hedge funds strategies become more popular, the chance to achieve profit by this strategies is shrinking. Therefore two models to generate long-short portfolios are proposed. By this approaches a portfolio A for the longand a portfolio B for the short position were computed. The difference of the values of A and B is designed to oscillate from negative to positive and reverse. This behavior of oscillating or mean reverting stock prices was stated by e.g. E. Fama and K. R. French (1988). Mean reversion of portfolios can offer the possibility of statistical arbitrage. The proposed linear models were tested by stocks of the Tokyo stock exchange. The results seem to be applicable and show an additional advantage of low systematic risk.