Long short investing definition
The fund aims to minimize volatility with diversification. It also aims to minimize net exposure to the market by using various hedging strategies that focus on sectors, geographies, and market neutrality. Another example is the Guggenheim Long Short Equity fund, like many hedge funds this fund uses leverage to amplify returns. It invests with long and short positions in several sectors, including utilities, financials, consumers, and real estate.
Note A long-short equity strategy commonly used by hedge funds is called the equity strategy, which favors long positions. What It Means for Individual Investors A long-short equity strategy has several pros and cons to consider. Balancing long and short strategies can help investors develop a portfolio that is less correlated with market movements. So, they have the opportunity to earn gains that beat the broader market.
However, while this investing strategy can help minimize risk, it cannot eliminate all risk. Individual investors considering long-short equity funds should consider their fees, which tend to be higher than an average mutual fund. Higher fees, of course, can affect your profits. For example, the Guggenheim Long Short Equity fund charges a gross expense ratio of 1. The higher expense ratio with many long-short funds is due in part to the higher costs from leveraging, shorting, and more frequent trading in the funds.
Finally, experienced individual investors can also try their own form of a long-short strategy by using pairs trading, although keep in mind that this is an advanced trading strategy. Pairs trading is the practice of going long and short a stock in the same industry or sector. That way, a market drop would affect both positions. Long-short equity strategies can be differentiated from one another in a number of ways—by market geography advanced economies, emerging markets, Europe, etc.
An example of a long-short equity strategy with a broad mandate would be a global equity growth fund, while an example of a relatively narrow mandate would be an emerging markets healthcare fund. Long-Short Equity vs.
Equity Market Neutral A long-short equity fund differs from an equity market neutral EMN fund in that the latter attempts to exploit differences in stock prices by being long and short in closely related stocks that have similar characteristics. An EMN strategy attempts to keep the total value of their long and short holdings roughly equal, as this helps to lower the overall risk. To maintain this equivalency between long and short, equity market neutral funds must rebalance as market trends establish and strengthen.
So as other long-short hedge funds let profits run on market trends and even leverage up to amplify them, equity market neutral funds are actively staunching returns and increasing the size of the opposite position.
When the market inevitably turns again, equity market neutral funds again whittle down the position that should profit to move more into the portfolio that is suffering. A hedge fund with an equity market neutral strategy is generally aiming itself at institutional investors who are shopping for a hedge fund that can outperform bonds without carrying the high risk and high reward profile of more aggressive funds.
For example, an investor in the technology space may take a long position in Microsoft and offset that with a short position in Intel. The ideal situation for this long-short strategy would be for Microsoft to appreciate and for Intel to decline. To get around the fact that stocks within a sector generally tend to move up or down in unison, long-short strategies frequently tend to use different sectors for the long and short legs.
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