Long Only Constraint

The last few months have seen various reports of hedge funds changing their strategies to “long only”. Long only? Exactly, just another way to say buy and hold. Long only trading is limiting. Consider the wisdom of avoiding the “long only” constraint:

“The long-only constraint is so automatic in investment management that, often, we don’t even think about it. Yet this pervasive constraint can dramatically reduce efficiency and induce small stock biases — and these negative impacts increase with active risk. In fact, the advantage of long-short products [for example trend following trading] is the avoidance of the long-only constraint.”
Ronald N. Kahn
Canadian Investment Review

Buy & hope, buy & hold or long only — it’s all the same thing. The best traders do not just “buy”. The best traders enter markets, long or short, always with an exit plan. If you don’t have an exit plan as you enter, how do you know to ever get out?

Read PDF story for more information about the long only debate.