What Is a Long/Short Fund?
A long/short fund is a type of mutual fund or hedge fund that takes both long and short positions in investments typically from a specific market segment. These funds often use several alternative investing techniques such as leverage, derivatives, and short positions to purchases relatively undervalued securities and sell overvalued ones. Long/short funds may also be referred to as enhanced funds or 130/30 funds.
Key Takeaways
- Long/short funds use an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares.
- Long/short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both under-valued and over-valued.
- Long/short equity is commonly used by hedge funds, which often take a relative long bias—for instance, a 130/30 strategy where long exposure is 130% of AUM and 30% is short exposure.
Understanding Long/Short Funds
Long/short funds typically seek to enhance the returns from investing in a specific market segment by actively taking both long and short positions in securities. Long/short funds use varying active management techniques to determine portfolio holdings. They may also use leverage, derivatives, and short positions which can increase the risks of the fund as well as the fund’s potential total return.
Long/short funds represent some similarities to hedge funds. They seek to offer investment strategies with greater risk and greater return potential over standard benchmarks. Most long/short funds feature higherliquiditythan hedge funds, no lock-in periods, and lower fees. However, they still have higher fees and less liquidity than most mutual funds. Long/short funds also may require higher minimum investmentsthan other mutual funds. Long/short funds are more closely regulated than hedge funds therefore they have limitations on the use of leverage and derivatives where hedge funds do not.
Long/short funds can be a good investment for investors seeking targeted index exposure with some active management. Long/short funds also offer the advantage of hedging against changing market environments and other trends that active management can account for.
The most common long/short strategy is to be long 130% and short 30% (130 - 30 = 100%) of assets under management. To engage in a 130-30 strategy, aninvestment managermight rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. A manager will use a number of data sources and rules for ranking individual stocks. Typically stocks are ranked according to selection criteria (for example, total returns, risk-adjusted performance, or relative strength) over a designated look-back period of six months or one year. The stocks are then ranked best to worst.
The manager would invest 100% in the top-ranked stocks and short sell the bottom-ranking stocks, up to 30% of the portfolio's value. The cash earned from theshort sales would be reinvested into top-ranking stocks, allowing for greater exposure to the higher-ranking stocks.
Examples of Long/Short Funds
The performance of long/short funds, like any hedge fund, will vary from year to year, and the best funds in one year may lag in another. ICON and RiverPark are two of the top-performing long/short funds in 2017, but they lagged behind their peers in 2020. Still, they provide a good insight into what long/short funds do.
- ICON Long/Short Fund: The ICON Long/Short fund had a year-to-date performance of 25.96% as of Dec. 1, 2017. The fund’s investable universe includes all equity securities traded in the U.S. market. It uses the S&P 1500 Index as its benchmark. The fund uses quantitative analysis to identify undervalued and overvalued securities in the investment universe. It then takes long positions in stocks it believes to be undervalued and short positions in stocks it believes to be overvalued.
- RiverPark Long/Short Opportunity Fund: The RiverPark Long/Short Opportunity Fund is another top-performing fund in the category. Year to date as of Dec. 1, 2017, the Fund had a return of 24.07%. The Fund uses a proprietary investment process for identifying undervalued and overvalued securities. It also has a transparent framework for its portfolio holdings. The Fund invests in U.S. equities across all market capitalizations and may also invest in foreign equities. It seeks to buy undervalued companies and take short positions on overvalued companies. It generally holds 40 to 60 long positions and 40 to 75 short positions.
FAQs
Long/short funds are designed to maximize the upside of markets, while limiting the downside risk. For example, they may hold undervalued stocks that the fund managers believe will rise in price, while simultaneously shorting overvalued stocks in an attempt to reduce losses.
What is the meaning of long-short fund? ›
Long/short funds use an investment strategy to take a long position in underpriced stocks while selling short overpriced shares. Long/short trading goes beyond traditional long-only investing by taking advantage of profit opportunities from securities identified as both undervalued and overvalued.
What is an example of long term vs short-term investment? ›
Investing Goals: Long-term investment goals typically take years or decades to reach and may include retirement and saving for college. Short-term investing goals may take months or a few years. Examples of short-term investing goals can include saving for a vacation, wedding or home improvement.
How to answer why long-short investing? ›
A long-short equity strategy seeks to minimize market exposure while profiting from stock gains in the long positions, along with price declines in the short positions. Although this may not always be the case, the strategy should be profitable on a net basis.
What are the risks of long short funds? ›
Four main risks will always face long-short equity investors: MARKET RISK: the risk of loss due to the impact of general market movements. IDIOSYNCRATIC RISK: the risk of loss due to company-specific factors that are generally not correlated with the broad market movement.
Are long short funds a good investment? ›
Long/short funds may be a great addition to your investment portfolio. But before you dive in, make sure that you consider these factors: Fund performances vary. The strategy of any long/short fund is set by the portfolio managers, and the performance of individual funds varies widely.
What are 3 examples of long-term finance? ›
Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.
Which is more profitable short term or long-term? ›
There are several risks that are involved with investments which is why the stock market has a 50:50 success rate. It is for this reason, that short-term equity investments are considered as risky, whereas long-term investments are considered much more profitable and consistent in terms of returns.
What is long-term vs short term financing examples? ›
Short-term financing is a loan you take out and repay over a shorter period of time—generally one to two years. These loans are typically used to cover immediate needs, such as inventory or cash flow fluctuations. In comparison, long-term financing usually comes with multiyear repayment terms.
What does it mean if a stock is long or short? ›
Having a “long” position in a security means that you own the security. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own.
Generally speaking, going short is riskier than going long as there is no limit to how much you could lose. Furthermore, in most cases, short positions require borrowing from a broker and paying interest for the privilege.
How to run a long short portfolio? ›
The long-short equity strategy involves buying the stocks expected to rise (long positions) and selling the stocks expected to fall (short positions). It aims to gain from both market upswings and downturns while minimising overall market exposure.
What is the largest long short equity mutual fund? ›
The largest Long/Short ETF is the First Trust Long/Short Equity ETF FTLS with $1.31B in assets. In the last trailing year, the best-performing Long/Short ETF was CLSE at 41.75%. The most recent ETF launched in the Long/Short space was the Even Herd Long Short ETF EHLS on 04/01/24.
Where is the best place to put my money short term? ›
Places to Keep Your Short-Term Cash
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk.
Why is it called long and short position? ›
Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value.
What is the meaning of short funds? ›
Summary. Short-duration funds are debt funds that invest in debt and money market securities such that the duration of the fund portfolio is between 1 and 3 years. Short-duration funds invest mainly in short-term securities, with a part of their corpus allotted to longer-term securities.
What does it mean to short a fund? ›
Short selling is when a trader borrows shares and sells them, hoping the price will fall after so they can buy them back for cheaper. Shorting can help traders profit from downturns in stocks and protect themselves from losses.
What are the long term short-term funds? ›
Short-term vs long-term investments depend on individual financial goals. Short-term investments offer quick returns and liquidity, suitable for immediate needs. Long-term investments provide higher growth potential over time, ideal for building wealth and retirement planning.
