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Long Short Equity funds look to profit from both rising and falling movements in the Stock Market. The Funds will combine both Long and Short positions in stocks and adjust the Gross and Net market exposure.

With over 40% of Hedge Funds identifying as Equity Funds, Long-Short Equity is one of the main Hedge Fund strategies. The Strategy invests in listed equities. The objective is to produce returns via Alpha Generation, with a reduced level of Net exposure to the Stock Market. The Strategy is executed by taking Long and Short positions in Stocks and adjusting the Fund’s Net Exposure to the Stock Market, depending on the directional view for the Market. Long positions are opened in Stocks that are expected to outperform the Stock Market in a rising market, and if the Stock Market declines, these Stocks are expected to decline less. Short positions are opened in Stocks which are expected to underperform in a strong rising Stock Market, or for a Short position in a Stock to actually decline.

In order to open a Short position, the Manager needs to borrow the Stock and sell the Stock, thus generating cash. Adjusting the level of market exposure is key for Long Short Equity Funds and there are two methods to calculate market exposure being Gross and Net Exposure. The Gross Exposure is calculated by adding the Fund’s long positions and its short positions together. The Net Exposure is calculated by taking the Fund’s long positions and then subtracting the short positions. Both are expressed as a percentage. A Long-Short Equity strategy is not without risks. One of the key risks is being “bought in” where a Manager must cover its short position, as occurred in GameStop, in January 2021.

Of course, what could go wrong?

1) In a rising market, the Short Positions outpace the Long Positions.
2) In a falling market, the Long Position falls more than the Short positions.
3) A Short Position needs to be covered. Thus, the Hedge Fund must buy the Stock in the Market, no matter what. GameStop, January 2021.
4) No real directional movements in the Market and there is the cost of holding Short Positions.

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Warren William

Meet the author behind Smartest-Data. Warren William has a career in Finance and Investments extending over 35 years, both on the Buy Side and Sell Side. His most recent roles include, developing Institutional Risk Management Programs for managing Equity and Fixed Income Risk.  Prior to this Warren William work in Alternative Investments, in Investment Management and as a Buy Side Equity Analyst. Warren William brings a wealth of knowledge and expertise to the table, providing in-depth analysis and commentary on the latest trends in the Stock Markets. Contact information: wwBLOG@smartest-data.blog or Telegram +393339034488

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