Long-Short Investing

Traditional investment strategies are known as long-only, meaning they cannot sell stock they do not yet own (short-selling.) Such portfolios add value by performing better than a benchmark portfolio with similar characteristics.

A long-short portfolio should maximize the advantage of skilled investors, because they can profit both by buying stocks that will do well and selling short those that will not. If the long and short positions completely offset each other, the portfolio is said to be market neutral. In other words, it should not be affected by bull or bear markets, but only by the manager’s skill.

Since there are numerous risks related to short selling, many long-short portfolios constrain such risks by using pair trades. In a paired trade, one stock is bought and a similar stock (same industry, for example) is sold short. In this way, the bet is solely based on stock selection skill rather than industry performance. Even with this pairing in effect, however, the investment can lose significant amounts of money if the wrong stock does well.

For more information, see all articles on: Asset Allocation, Investing in Stocks, Investment Returns, Portfolio Management, Security Selection

See also:
  • Equitizing a Long-Short Portfolio
  • Long-Short Extension Strategies
  • Benchmarking Issues for Hedge Funds
  • Types of Hedge Funds
  • Portable Alpha
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