how long short equity works
long short equity works by exploiting profit opportunities in both potential upside and downside expected price moves this strategy identifies and takes long positions in stocks identified as being relatively underpriced while selling short stocks that are deemed to be overpriced while many hedge funds also employ a long short equity strategy with a long bias such as 130 30 where long exposure is 130 and short exposure is 30 comparatively fewer hedge funds employ a short bias to their long short strategy it is historically more difficult to uncover profitable short ideas than long ideas long short equity strategies can be differentiated from one another in a number of ways by market geography advanced economies emerging markets europe etc sector energy technology etc investment philosophy value or growth and so on 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 neutrala 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 long short equity example the pair tradea popular variation of the long short model is that of the pair trade which involves offsetting a long position on a stock with a short position on another stock in the same sector for example an investor in the technology space may take a long position in microsoft and offset that with a short position in intel if the investor buys 1 000 shares of microsoft at 33 each and intel is trading at 22 the short leg of this paired trade would involve purchasing 1 500 intel shares so that the dollar amounts of the long and short positions are equal the ideal situation for this long short strategy would be for microsoft to appreciate and for intel to decline if microsoft rises to 35 and intel falls to 21 the overall profit on this strategy would be 3 500 even if intel advances to 23 since the same factors typically drive stocks up or down in a specific sector the strategy would still be profitable at 500 although much less so 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 for example if interest rates are rising a hedge fund may short interest sensitive sectors such as utilities and go long on defensive sectors such as healthcare 