A long-short equity fund is one of the oldest and most popular forms of investing. The world’s largest hedge fund employs long-short equity strategies to outperform the market. In this guide, you’re going to look at the tools hedge fund managers use to generate impressive returns for their investors.
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It’s estimated that over $1 trillion worth of assets in the hedge fund space is allocated to long-short equity strategies. That accounts for 30% of the entire hedge fund industry. The long-short equity covers several distinct strategies that you or any serious investor can take advantage of.
Most investors don't quite understand how to select the appropriate stocks to invest in. The best solution for the average investor is to buy shares into a mutual fund like Blackrock long-short equity fund.
Mutual fund shares are usually inexpensive and you have the advantage of not having to buy thousands of shares yourself. It’s better to let someone more experienced make the decision as to where you invest your money.
Now, let’s start with what a long-short equity hedge fund is, and how you can invest in these mutual funds.
The traditional long-short equity involves buying stocks that are relatively undervalued, and at the same time, selling stocks that are overvalued. Basically, an equity long-short strategy is a trading strategy that demands taking long positions in stocks that are expected to appreciate over time and short positions in stocks that you expect to depreciate in value over time.
Essentially, the long-short equity strategy is a market-neutral strategy.
If you’re good at stock selection, you should be at market neutral.
Long-short equity can involve selling an index future or ETFs. Otherwise, the short position can be only a partial short if the market is rising.
A long-short hedge fund can be successful if the right long positions and the right short positions are picked. Nowadays, hedge funds are more sophisticated and they employ quantitative techniques to pick the right stocks and indicate when to potentially buy or sell them.
A key aspect to make a long-short equity strategy work is to have a predictive model that uses a factor value to rank stocks. The capital needs to be allocated properly. As long as we’re holding close to an equal amount of the capital, both long and short, we’re pretty well balanced for any given market.
If we’re holding 100 securities long, and 100 securities short, it generally tends to end up being market neutral. So whether we have a bullish market or a bearish market, we’re pretty balanced.
The second critical element of the long-short equity model is how much capital you allocate to each of your selected stocks. Hedge funds use risk models or some type of optimization routine when sizing these positions.
Alternatively, you can pick mutual funds and hedge fund managers who have the ability to pick the right stocks to invest in. A good hedge fund manager has the infrastructure and is better than the average investor at stock selections.
What this means is that sometimes hedge fund managers can find opportunities where share prices are rising, have the ability to get the long side, while also going short on stocks that perform badly. In this instance, they are able to make money on both the long and the short side at the same time.
Even if the market as a whole doesn’t move because of this type of diversification, mutual funds can generate good profits and manage risk by not having a huge amount of market exposure.
Next, let’s dive into our next subject and define what is a mutual fund?
Mutual Funds Explained
A mutual fund is like a bowl of investment stew were thousands or even millions of investors pool their money to buy a variety of investments. These investments can be stocks, commodities, bonds or currencies which are blended together and then divided among investors.
Just as a restaurant serves a variety of different foods, mutual funds also come in a lot of different flavors.
Some mutual funds can focus on a specific sector of the economy, others can focus on emerging markets, some may focus only on large-cap stocks. However, mutual funds can have the ability to be customized.
As we mentioned earlier, there are equity funds that try to stay market-neutral and are both long and short stocks. It’s important to pick a long-short equity fund that matches your investment horizon.
For this purpose, we have assembled a list of the best long-short equity mutual funds to invest in 2019.
Long Short Equity Hedge Fund
Some of the characteristics of a long-short fund are that you’re able to take advantage of the entire investment insights of a hedge fund team.
This allows you to have a much broader set of opportunities. Secondly, in a market sell-off or a market crash, the short position provides an opportunity to make profits during difficult times, which a long-only fund doesn’t have.
In essence, the long-short equity has less market risk which translates into a better downside protection that won’t correlate with the markets.
Most hedge fund managers are global, regional, or sector-focused.
So here are our top-rated long-short equity mutual funds you can invest in.
Take a look at the long-short equity hedge funds list:
Blackrock Long Short Equity Fund
Founded in 1988, Blackrock is the world’s largest asset manager with $6.5 trillion in assets. However, the size of the Blackrock long-short equity fund is $615.2 million.
The Blackrock fund tries to outperform the market by studying the latest economic data and picking which stocks to buy and which stocks to sell. As you can imagine, the fees on actively managed funds tend to be a little bit higher than the passively managed funds.
We can see that the Blackrock year-to-date return is 3.83%.
Next, we’re going to look at a long-short equity fund that seeks capital appreciation.
AQR Long-Short Equity N
If you’re a savvy investor and want a more modern approach, you can choose to buy shares into AQR long-short equity N. This fund seeks to provide higher risk-adjusted returns with a lower volatility compared to the global equity market.
The AQR long-short equity N is interested in beating the benchmarks by selecting stocks based on “value, momentum, and quality.” The long-short equity fund year-to-date return is 0.93%.
If you want to have exposure to a more conservative asset management, you can buy shares into our next top long-short equity fund pick.
Locorr Long Short Equity Fund
If you don’t have any mutual fund investments in your portfolio, you can start by buying shares into Locorr long-short equity fund. Locorr's investment philosophy is to match the S&P 500 performance.
Usually, a passive fund has as the main goal to match the benchmark performance and not beat them. If beating the market is too risky, you can safely choose a passively managed mutual fund like Locorr. Currently, the year-to-date fund return is 11.91%.
A passive long-short fund is also much cheaper because it requires less analysis and fewer trades.
Next on our list is a long/short equity fund that focuses primarily on US stocks.
Thornburg Long Short Equity Fund
The Thornburg long-short equity fund's goal is to deliver the same type of returns as the S&P 500 index, but with less volatility. They don't focus on any particular market sector, but look to pick individual stocks that will allow them to pursue long-term capital appreciation.
The fund of year-to-date returns stands at 7.79%
There are over 100 traditional long-short equity funds, so feel free to explore other top mutual funds.
Conclusion – Long-Short Equity
In summary, investors who want a bit of diversification in their portfolio can choose a long-short equity hedge fund to place their money. The Blackrock long-short equity fund or any other long-short mutual fund is not going to be correlated with markets. The fact that it’s won't go up and down with the market provides us diversification benefits.
Mutual fund shares like the Blackrock long-short equity fund is an important option in saving for retirement. The long-short equity strategies are amazing because they allow the average investor to invest like a hedge fund manager.
If you’re invested in a 401K plan, you have to already own a mutual fund. Since you are paying a fee, don’t be afraid to contact them to find out if you own a long-short equity mutual fund. Everyone should prepare for retirement, and mutual funds are very popular among investors.
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