The advantages of an engineered approach are perhaps best exploited by strategies that are not constrained to deliver a benchmark-like performance. An engineered style rotation strategy, for example, seeks to deliver returns in excess of the market's return by forecasting style subset performance. Shifting investment weights aggressively among various style subsets as market and economic conditions evolve, style rotation takes advantage of the historical tendency of any given style to outperform the overall market in some periods and to underperform it in others. Such a strategy uses the entire selection universe and offers potentially high returns at commensurate risk levels.

Allowing short sales as an adjunct to an engineered strategy, whether that strategy utilizes core equity, a style subset, or style rotation, can further enhance return opportunities. While traditional management focuses on stock picking, the selection of “winning” securities, the breadth of engineered management allows for the consideration of “losers” as well as “winners.” With an engineered portfolio that allows shorting of losers, the manager can pursue potential mispricings without constraint, going long underpriced stocks and selling short overpriced stocks.

In markets in which short selling is not widespread, there are reasons to believe that shorting stocks can offer more opportunity than buying stocks. This is because restrictions on short selling do not permit investor pessimism ...

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