Trimability and Fast Optimization of Long-Short Portfolios

Abstract

Optimization of long-short portfolios through the use of fast algorithms takes advantage of models of covariance to simplify the equations that determine optimality. Fast algorithms exist for widely applied factor and scenario analysis for long-only portfolios. To allow their use in factor and scenario analysis for long-short portfolios, the concept of trimability is introduced. The conclusion is that the same fast algorithms that were designed for long-only portfolios can be used, virtually unchanged, for long-short portfolio optimization — provided the portfolio is trimable, which usually holds in practice.

Keywords: Portfolio Management, Asset Allocation, Investment Theory, Portfolio Theory, Quantitative Tools, Mathematical Methods, Alternative Investments, Hedge Fund Strategies