Discuss Numeric's Investment Strategy? What Is Its Rationale for Numeric?

Q1 - Discuss Numeric's investment strategy? What is its rationale for Numeric?

Sol 1 - Numeric's investment strategies were:

1. Long - only strategy

2. Long / Short strategy with equitization

3. Long / Short strategy without equitization

Numeric managed tax-exempt accounts for pension funds and endowments and funds of funds taxable accounts. Firm managed different funds across seven product categories. Five of the product categories involved long-only strategies whereas rest two categories involved long/short strategies. Both of the categories were offered with and without equitization.

Q2 - What is the difference between long only and long/short strategies? Do they involve the same level of risk?

Sol2 - Long / short strategy was considered more advantageous in comparison to long-only strategy. Long-only strategy could be profitable only if share prices of owned securities increase whereas long / short strategies allowed one to exploit negative as well as positive information. Long-only strategies forced to mirror the sector exposure of the benchmark and might result in owning the stock in a sector having no compelling purchase and thus it tended to bundle diversification along with stock selection whereas long/short strategies could be managed more easily for pure stock selection and offered investor much higher alpha per dollar of assets invested.

No they involved different risks. Long only strategies was exposed to two different sector risks which were bundled for diversification and it might not result in eliminating the sector specific risk completely whereas long / short strategies could largely eliminate all except stock specific risks which was also there in case of long-only strategy.