Understanding Liquid Alternatives
Long-Short Equity Strategies
What Is Long-Short Equity?
Long-Short Equity is an active investment strategy that seeks to generate alpha by taking long positions in stocks expected to appreciate and short positions in stocks expected to decline. By doing so, it aims to profit from both rising and falling prices, regardless of overall market direction.
Unlike traditional long-only equity strategies, Long-Short Equity strategies have the ability to reduce market exposure and potentially limit downside risk, offering a more flexible and tactical approach to equity investing.
How It Works
The goal is to capture alpha from stock selection on both sides of the portfolio while managing overall risk.
- Long Positions: Shares purchased in attractive companies.
- Short Positions: Borrowed shares sold in companies expected to underperform.
- Net Exposure: Ranges from market-neutral to moderately net-long, depending on the manager’s view.
Potential Benefits of Long-Short Equity
- Alpha Opportunities: The ability to take both long and short positions allows for the potential to generate alpha from stock selection.
- Risk Management: Short positions may act as a hedge against market downturns, reducing overall portfolio risk.
- Flexibility: Long-short equity strategies have the ability to profit from both rising and falling stock prices, providing flexibility in various market conditions.
Key Risks
- Short Squeeze Risk: Losses on short positions if heavily shorted stocks rise unexpectedly.
- Leverage: Has the potential to amplify both gains and losses.
- Manager Skill Dependency: Success relies heavily on stock selection ability.
Long-Short vs. Equity Market Neutral
While both use long and short positions, Long-Short Equity seeks to outperform the market with reduced risk, while Equity Market Neutral attempts to eliminate market risk entirely to focus on relative value opportunities.
| Feature | Long-Short Equity | Equity Market Neutral |
|---|---|---|
| Net Market Exposure | Typically net long | Close to zero |
| Return Source | Alpha + beta | Pure alpha |
| Volatility | Moderate | Low |
| Objective | Enhanced returns with reduced risk | Returns independent of market direction |
Source: AQR. For informational purposes only. The comparisons herein are not exhaustive and do not address all relevant features, risks, or considerations associated with the strategies discussed. Investors should conduct their own due diligence before making any investment decision.
Who Typically Uses Long-Short Equity?
- Investors seeking alpha from active stock selection.
- Those looking to reduce equity market beta.
- Portfolios needing a hedge during downturns.
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There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
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