Direction: Long-only, Long + Short, Short-only

Also seen as: Position direction, Position side, long/short, shorting

Fincanva describes how these settings behave; it never recommends holding short positions or tells you which direction to run. Fincanva provides no financial advice — see Is this financial advice?.

What does going short mean?

Going short means selling an instrument the strategy does not own, with the obligation to buy it back later. The instrument is borrowed, sold at today's price, and repurchased at whatever the price is when the position closes; the difference between the two prices is the result. A short position therefore gains when the price falls and loses when the price rises — the reverse of owning the instrument.

Two consequences matter, and both are mechanical facts rather than opinions:

• The loss on a short position has no fixed ceiling. A long position's worst case is bounded: the instrument can fall to zero and no further, so you can lose what you put in. A price can rise without any upper limit, so the amount a short position can lose is not capped in principle. This is why short exposure is treated as a distinct, opt-in setting rather than a default.
• Shorting has a carrying cost. Borrowing an instrument to sell it is charged at a rate above the reference rate — modelled in Fincanva as the short-rate markup, see Interest-rate markups. That cost only enters the numbers when costs are switched on in the simulation assumptions; with costs off, the backtest shorts for free, which real markets do not.

Which allocation methods offer a direction setting?

Direction is a per-method setting, not one switch for the whole strategy — three allocation methods show a direction control, and each names it in its own words.

For MPT (Markowitz) the app states the rule exactly: "Long-only requires every weight ≥ 0. Long + Short allows negative weights (short positions)." For Beta Neutral, which is built around a long leg and a short leg, choosing a single side changes what the method is doing — the hint reads: "Long-only and Short-only relax the neutral constraint to a single-sided book." Inverse Volatility shows the same "Long-only" / "Long + Short" pair, but whether that choice reaches the backtest is not confirmed today: the evidence on the engine side conflicts, so Fincanva does not publish an effect for it yet. Every other method allocates long only.

The Position side control on Beta Neutral also appears elsewhere in the app under the shorter labels Long, Both, and Short — the same three choices, differently named.

Does direction apply inside a Combined?

No — direction lives inside a strategy, among its instruments. When a Combined splits capital across its member strategies, none of the six methods available at that level offers a direction control, and the split across member strategies is always positive: a Combined cannot be "short" one of its own strategies. If short exposure exists at all, it was created by a method inside one of those strategies.

Defaults in Fincanva

• Long-only is the default for Beta Neutral, whose "Position side" starts on "Long-only".
• MPT (Markowitz) starts on "Long + Short" at the strategy level, so shorting is allowed unless you switch it to "Long-only". At the Combined level MPT has no direction control and is positive-only by construction.
• When MPT allows shorts, an instrument's weight may range from −1 to 1; restricted to "Long-only" the range is 0 to 1.
• A negative weight is how a short position is expressed — its size is the weight's magnitude, its direction the sign.
• Short-position financing costs are modelled only when costs are switched on.

Worked example

A strategy holds two instruments, A and B, and runs a method set to "Long + Short". The method returns a weight of +0.60 for A and −0.40 for B: 60% of the allocated capital is long A, and the equivalent of 40% is short B.

Over the next period A rises 10% and B falls 10%. The long leg contributes 0.60 × (+10%) = +6%. The short leg gains when B falls, so it contributes (−0.40) × (−10%) = +4%. The strategy is up about 10% before costs.

Now run the same period with B rising 10% instead. The short leg contributes (−0.40) × (+10%) = −4%, so it loses exactly what it would have gained. And if B had risen 50%, the short leg would have cost 20% — the loss scales with the price move, with no point at which it stops.