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Long-short funds are an investment strategy associated with hedge funds. It involves buying long equities that are estimated to grow in price and selling short equities that are thought to decrease in value. Unlike most mutual funds, long-short funds use various different strategies are used in order to maximise their total returns despite the market conditions, these include; leverage, derivatives and short positions
Usually the equity of long and short investments is based on “bottom up” fundamental analysis of individual companies. There may also be “top down” analysis of the risks and opportunities obtainable by industries, sectors, countries and by the macroeconomic situation. Long-short funds cover a wide range of strategies. Generalists and managers often focus on certain industries and sectors or regions. Managers may be focusing on particular categories, such as large or small cap, value or growth. Many trading styles have either frequent or dynamic traders whilst others have longer-term investors. Market neutral approaches can be seen as a case of equity long-short funds, whereby the long and short portfolios are balanced with such care to ensure that a high degree of hedging is achieved. ‘Market neutrality’ refers to hedging out any possible market risks which can be managed using derivatives. Market neutral funds tend to avoid hedging against any risks probable.
In order to make money, the hedge fund must be able to successfully predict which stocks perform better than others. This requires the ability to make intelligent use of the existing information. It also entails a better use and understanding of the information given than large numbers of capable investors. This strategy is predominately fulfilled by hedge funds and institutions.
Long-short funds are the mutual fund industry’s attempt to bring the advantages of a hedge fund to a common investor. The majority of funds include higher liquidity, no lock-in period and lower fees. Although, their fees are higher and have less liquidity than most other mutual funds. Some long-short funds require a minimum investment of more than $1000. Long-short funds are also not allowed to use as many derivatives, short positions or as much leverage as hedge funds. However they do not provide diversification to the investor in down markets.
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