Are You Applying The Correct Long Short Equity Strategy?

 Long-short equity strategy is a portfolio management approach in which the manager aims to reduce market risk by having both long and short positions. The concept is that if the market falls and the long positions lose money, the short positions will make money, reducing overall losses and keeping the portfolio profitable. Let's take a look at how the long-short equity approach works and how you may incorporate it into your own portfolio.

 

The positions of the long short funds in India allow it to benefit in both bull and bear markets. This method of attempting to produce gains regardless of market conditions is also known as absolute return investing or hedging.

 

In general, investment managers use this method to select inexpensive companies to purchase and overpriced stocks to short. Over time, the portfolio can profit if the cheap stocks rise and the overpriced equities fall.

 

Let’s understand the underling working of this strategy in an asset management company.

 

The long-short approach originated in hedge funds and is currently utilised in mutual fund management. Individual traders use it less frequently. Long/Short Equity Fund that selects long and short positions in global stocks using standard fundamental research. The fund seeks to reduce volatility through diversification. It also tries to reduce net market exposure via the use of various hedging methods that focus on sectors, regions, and market neutrality.

 

These asset management firms take long and short positions in a variety of industries, including commodities, financials, consumers, and real estate.

 

A long-short equities strategy has various advantages and disadvantages to consider. Investors can construct a portfolio that is less connected with market swings by balancing long and short strategies. As a result, they have the potential to outperform the market.

 

However, while this investment method might assist to reduce risk, it cannot completely remove risk.

 

Individual investors considering long short funds in India should be aware that their costs are often greater than those of a typical mutual fund. Higher fees, of course, might have an impact on your profitability.

 

Finally, experienced individual investors or the asset management company may use pairs trading to create their own version of a long-short strategy. However, keep in mind that this is a complex trading method. Pairs trading is the practise of buying and selling stocks in the same industry or sector at the same time. In this manner, a market decline would effect both positions.