what is a long short fund 
a long short fund is a type of mutual hedge or exchange traded fund etf that takes both long and short positions in investments essentially they take long positions in stocks they expect to increase in value and short positions in stocks they think are headed lower these funds often use investing techniques leverage derivatives short positions and more first used by hedge funds and then taken up by mutual funds and etfs later as the name suggests most hedge funds are of this type while the financial industry regulatory authority finra lists 176 mutual funds and etfs in this category 1 long short funds are also called enhanced or 130 30 funds understanding long short fundslong short funds aim to boost returns by investing in specific markets and employing both long and short positions due to the active management expertise and analysis required these funds typically have higher expense ratios as of 2024 the average expense ratio for long short funds listed in the finra database is 1 98 compared with 0 42 for all equity mutual funds in 2023 23like their long short hedge fund counterparts these mutual funds and etfs use similar strategies but with notable differences they offer a comparable mix of investments balancing higher risk and the potential for greater returns against standard benchmarks most long short funds provide higher liquidity than long short hedge funds have no lock in periods and have relatively lower fees however they still maintain higher expense ratios and lower liquidity than other public funds in addition many of these funds require larger minimums to get started and are among the 9 of mutual funds that impose front and back end loads commissions 2historically mutual funds and etfs particularly those employing long short strategies had limits on the leverage and risks they could undertake dating to the great depression these restrictions protect average investors who might not fully grasp the complexities of these financial instruments despite the loosening of some rules over the years oversight remains stringent to safeguard public investors from undue risks 4long short funds can be a good investment for investors seeking targeted index exposure with some active management as long as you know the risks involved long short funds also offer the ability to hedge against changing markets and other trends that better managers can adjust for the 130 30 strategythe most common long short strategy is to be long 130 and short 30 130 30 100 of assets under management 5 for example a fund manager might rank the expected returns for s p 500 stocks from best to worst a fund management team accesses massive amounts of data and uses quantitative rules to rank the stocks the selection criteria could include total returns risk adjusted performance or relative strength for a given period six months a year or what have you the manager could then invest 100 in the top ranked stocks and short sell the bottom ranking stocks up to 30 of the portfolio s value earnings from the short sales would be reinvested in the top ranking stocks allowing for greater exposure to their rising prices 5examples of long short fundslet s take a look at two examples to clarify how two funds in this category can still spread their assets very differently the aqr long short equity fund has been one of the better long term performers in the long short equity fund space the fund invests in companies across the globe and in many sectors as seen in the chart below you can see the percentage of its long and short holdings in each industry the fund had annualized total returns of 23 04 13 32 and 10 6 over the previous three five and ten years up until the end of the first quarter of 2024 it had an annual expense ratio of 4 35 6investopediathe invesco s p 500 downside hedged etf phdg is an actively managed etf that aims for positive returns in both up and down markets whatever the trends of stocks and bonds the etf is a good contrast with qleix in how a long short fund can use very different ways to hedge against downside risks while qleix is typically short in the same sectors it s gone long phdg distributes its assets across the components of the s p 500 dynamic veqtor index the latter contains equity representing the s p 500 index a volatility hedge as represented by the s p 500 vix short term futures index and cash a chart showing its holdings is below invesco says its fund tracks the performance of the broader equity markets while providing a hedge against implied volatility the fund adjusts its exposure based on the equity and volatility of the s p 500 index the fund s expense ratio was 0 39 in april 2024 relatively low for an actively managed fund though it has features of an index fund which generally costs less meanwhile it had three five and 10 year returns of 4 41 7 05 and 4 69 respectively investopedia