![]() ![]() These fees are on the higher side compared to mutual funds and ETFs which have around 1% to 3% as the expense ratio. The potential drawback of such a strategy is that hedge funds usually charge high annual management fees of about 2% along with performance fees of up to 20% of the profit. Instead, such a strategy sets out to gain returns from both rising and falling markets. The reasoning here is that a long-short strategy does not rely only on rising markets to generate returns. Historically, the returns from such a strategy have shown very little volatility as measured by standard deviation.Ī typical long-short strategy also has lower maximum drawdowns compared to other portfolios. The biggest benefit of this strategy is that it limits the downside risk of the portfolio. Pros and cons of Long Short Equity strategy Finally, the additional source of returns depends on the managers ability to make tactical decisions to modify the portfolio’s net market exposure according to their changing views of the market. The market exposure of such a strategy is normally low with most funds aiming to keep the long-term beta under 0.5. ![]() ![]() In order to generate greater risk-adjusted returns, managers tend to invest in highly diversified portfolios including a large set of stocks from different industries as well as some exposure to global equity markets. Short selling skill of a manager is especially important, as it not only hedges the position in case of a crash, but can also help generate returns from the overvalued/poor quality stocks. By actively selecting the stocks in the appropriate long or short positions, a manager can maximize returns from both the positions, while still keeping the portfolio market-neutral. This approach will help protect the performance of the portfolio from price fall in any of the sectors and makes the portfolio less volatile.Ī hedge fund manager employing a long-short strategy must be skilled in identifying the correct stocks in a long-short portfolio. Therefore, this strategy is known as a market-neutral strategy.Ī more sophisticated way to construct this portfolio is to deploy equal amounts of money in long positions and short positions within each sector to form a sector-neutral portfolio. The rationale is that the long positions are expected to increase in value whereas short positions are expected to decrease in value.Ī portfolio constructed in this fashion helps to protect from losses during the market crash. ![]() Long short equity strategy is a popular strategy used by hedge funds where long positions are taken in stocks that have superior return characteristics and short positions are taken in stocks that have inferior characteristics. Transaction costs and slippages of the Long Short Equity strategy.Rebalancing frequency for the Long Short Equity Strategy.Choice of capital allocation for the Long Short Equity strategy.Choice of the ranking scheme for the Long Short Equity strategy.Implementing the Long Short Equity strategy in Python.Steps to build the Long Short Equity strategy.Working of the Long Short Equity strategy.Pros and cons of Long Short Equity strategy.You will also see its implementation in Python along with the results of backtesting. In this article, you will learn about how this strategy works and how one should approach building such a strategy. This strategy is normally used by hedge funds to generate greater risk adjusted returns due to its inherently low risk characteristics. As the name suggests, long short equity strategy is one where we take both long and short positions in different equities. ![]()
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