Long short equity trading strategies
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In a long-short equity approach, the investor takes a mix of long and short positions, hoping to create a portfolio that is balanced to take advantage of both rises and falls in the market.
A long-short equity position is a strategy used mainly by large firms such as hedge funds or mutual funds. In this trading scheme the investor takes a combination of long and short positions in a single portfolio.
Managers, therefore, make leveraged bets on how the shape of the yield curve will change. Source: Bloonerg as of May 12, Those managers who have enjoyed success in their funds are occasionally seduced by the prospect of increasing their capital base by taking new subscriptions. Hopefully you aren't entering the blast furnace. Historical performance of the long-short strategies of a hedge fund can be found at EurekaHedge.
They take long positions buying shares to profit off price gains in stocks that they believe are undervalued and poised for growth. They take short positions borrowing shares to sell and profit off price decreases in stocks they believe are overvalued and poised to decline. The result is a mixed portfolio. This is not necessary, however, and a particularly pessimistic investor could even emphasize short positions if they felt that was wise.
Many long-short portfolios will emphasize particular markets or geographic areas. For example, an investor could build their portfolio around a specific sector, like technology or retail firms. There are three main reasons to use this strategy. There are generalists, and managers who focus on certain industries and sectors or certain regions.
Monthly Returns
Managers may specialize in a category — for example, large cap or small cap, value or growth. There are many trading styles, with frequent or dynamic traders and some longer-term investors. A fund manager typically attempts to reduce volatility by either diversifying or hedging positions across individual regions, industries, sectors and market capitalization bands and hedging against un-diversifiable risk such as market risk.
In addition to being required of the portfolio as a whole, neutrality may in addition be required for individual regions, industries, sectors, and market capitalization bands. There is wide variation in the degree to which managers prioritize seeking high returns, which may involve concentrated and leveraged portfolios, and seeking low volatility, which involves more diversification and hedging.
This is in addition to market neutral strategy, as it adds a permanent stock index futures overlay, which makes profit or losses, depending on the movement of the market. Your portfolio then has a full equity market exposure. With this position, any event that causes all auto industry stocks to fall will cause a profit on the DaimlerChrysler position and a matching loss on the Ford position. Similarly, events that cause both stocks to rise—for example a rise in the market as a whole—will have little or no effect on the position.
The Various Strategies of Hedge Funds
Presumably the hedge fund has sold DaimlerChrysler and bought Ford because the manager expects Ford to perform better. If the manager is correct, the fund should profit irrespective of market and sector moves. Some advantages of market neutral strategies include being able to generate positive returns in a down market, and generating returns with a lower volatility profile.
Long/short equity is an investment strategy generally associated with hedge funds. It involves buying equities that are expected to increase in value and selling short equities that are expected to decrease in value. Long/short equity is basically an extension of pairs trading, in which investors go long and short on two competing.
Rather, it is a tool that, under controlled circumstances, may be employed to increase overall exposure to a portfolio stocked if you'll excuse the pun with good ideas. Investors can be persuaded of the benefits of getting "more bang for their buck" if the intent to leverage is fully disclosed and subsequently managed in compliance with the stated objectives and the return target of the portfolio. Properly-timed entry and exit of positions, and by extension understanding the market's movement, can become a significant contributor to alpha generation.
However, the manager must be careful not to let his attention wander from the strategy to the screen. A balance must be struck between attention and distraction. The investor accepts risk, but needs to feel that the manager is comfortable in his ability to identify and mitigate the risks inherent to this strategy.
Long-Short Equity Definition
Thus, a manager can greatly assuage any investor concerns by offering a clear articulation of how he intends to balance each of the aforementioned elements. In turn, the ability to offer this explanation entails a thorough consideration of all the relevant issues. Email this Article to a friend. Your Name. Friend's Email. Refresh Input symbols. Please enter your contact details to download the report.
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Long Short Equity Strategies: "Hedging" Your Bets
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