When Equity Factors Drop Their Shorts

Although factor premiums originate in both long and short legs of factor portfolios, we found that (1) most added value comes from the long legs, (2) the long legs offer more diversification than the short legs, and (3) the performance of the short legs is generally subsumed by that of the long legs. These results are robust over size, time, and markets and cannot be attributed to differences in tail risk. We also found that the claim that the value and low-risk factors are subsumed by the new (post-2015) Fama–French factors does not hold for the long legs of these factors.Disclosure: The authors disclose that they are employed by Robeco, a firm that offers various investment products. The construction of these products may, at times, draw on insights related to this research. No other person or party at Robeco except the authors had the right to review this article prior to its circulation. The views and results presented in this article were not driven by the views or interests of Robeco and are not a reflection of its points of view. Editor’s Note Submitted 21 November 2019Accepted 29 May 2020 by Stephen J. BrownThis article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Malcolm Baker and one anonymous reviewer were the reviewers for this article.