Cross Sectional momentum Strategy | Risks of Long Only Strategy

AI & Machine learning
1

Hi,



It is said that the long-only strategy is slightly risky because it is exposed to market risks. What exactly these risks are? 



Based on the provided experiments the Long only Cs Strategy shows a 2.5 higher return for the same period than the Long Short Skip CS Strategy. 



Links to plots:

LongShortSkipCsStrategyREturn.png - Google Drive

LongOnlyCS_Strategy Return.png - Google Drive

2

Hi Boris,



The long-only strategy is risky as during a panic scenario in the market there is a sharp drawdown while in the case of a long-short strategy during a panic scenario the portfolio is hedged with the short component. 

Yes, the returns are higher in the case of a long-only strategy but it is more exposed to the risks arising due to market dynamics.



Hope that helps!



Thanks,

Akshay