Reviewed by Sep 30, 2020| Updated on
It is a type of a hedge fund or a mutual fund typically from a specific market segment that takes both long and short positions in investments. To buy comparatively undervalued securities and sell overvalued securities, these funds often use many alternative investment strategies, such as leverage, derivatives, and short positions.
Long/short funds utilise an investment strategy that aims to take a long position in low-priced stocks while selling short overpriced shares. Long/short funds aim to increase conventional long-only investment by leveraging profit opportunities from securities described as both undervalued and overvalued.
Hedge funds are widely used for long/short equity, which often requires a relatively long bias—for example, a 130/30 strategy where long exposure is 130% of AUM and 30% of short exposure. Long/short funds can also be called improved funds or 130/30 funds.
Typically, long/short funds seek to boost returns from investing in a particular market segment by actively taking both long and short securities positions. To determine portfolio positions, long/short funds use different active management techniques. They might also utilise derivatives and short positions to increase the fund's risks as well as the potential total return of the fund.
There are some parallels between long/short funds and hedge funds. Long/short funds aim to offer greater risk and return potential investment strategies over traditional benchmarks. Most long/short funds have greater liquidity than hedge funds, fewer duration of lock-in, and lower fees. Nevertheless, they still have higher fees than most mutual funds, however, and less liquidity.
Long/short funds may also require a higher minimum investment compared to other mutual funds. Long/short funds are regulated more closely than hedge funds, so they have restrictions on the use of leverage and derivatives where hedge funds are not.
Long/short funds can be a good investment with some active management for investors looking for targeted index exposure.