Long/Short Equity
AdvancedLong/short equity is an investment strategy that involves buying shares expected to rise in value, known as long positions, and short selling shares expected to fall, known as short positions.
Long/short equity is one of the oldest and most common hedge fund strategies, tracing back to Alfred Winslow Jones’s first hedge fund in 1949.
The strategy aims to profit from stock selection, both by picking shares that outperform and identifying shares that underperform. Short positions also reduce the portfolio’s exposure to overall market movements, because losses on long positions in a falling market may be partly offset by gains on short positions.
For example, a fund might hold long positions worth 100,000,000 and short positions worth 60,000,000. Its gross exposure is 160,000,000, and its net exposure is 40,000,000, or 40% of a 100,000,000 portfolio, meaning it benefits moderately if the overall market rises.
Long/short funds vary widely in their net exposure. Some are mostly long, while others aim to be close to market neutral. Managers may focus on particular sectors, regions or styles.
The strategy’s success depends on the manager’s skill in selecting shares. Short selling carries risks, including potentially unlimited losses and short squeezes. Costs of borrowing shares and fees can reduce returns.
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