Understanding Equity-Long Only Strategy

Long-only funds offer a variety of benefits. There is more room to calibrate the correct investment position and greater scalability in those investments, first and foremost. While hedge funds shorting equities may find it difficult not just to get into a position but also to purchase enough shares to make the position profitable, sustaining a long position that can be steadily built over time with low leverage is less of an issue. Long-only hedge funds can focus on certain industries, such as small cap manufacturers with emerging market exposure, while hedging broader market risk. Most long-only hedge funds differ from standard long-only hedge funds in that they do not invest in or benchmark to a market index (except as a hedge), instead attempting to uncover specific areas of asset and liability management where alpha can be generated.

 

The biggest downside of a long-only strategy is potential competition from other asset managers as well as hedge fund management costs. The lack of long-only funds in the early hedge fund industry was due to investors' desire for higher returns and a fund that was more actively managed. Investors were also willing to pay for it, with hedge fund managers typically receiving 2% of total asset value plus 20% of profits made. However, when hedge funds embrace more traditional investment strategies, there is a tension between hedge fund fees and conventional fund fees, which are much lower. It's possible that long-only funds earn adequate returns to justify increased compensation, but it's also possible that long-only funds are looking for new compensation models to stay competitive.

 

Long-only hedge funds appear to be here to stay, despite their similarities. While some industry veterans may be wary of the idea of a long-only hedge fund, the expansion of hedge funds into other niches may indicate a maturation of the asset class and a better understanding of alpha among investors. Indeed, when long-only funds' returns catch up to those of other funds using more contrarian investment techniques, the original link between alpha and "active" management may be fading.