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miércoles, 10 de febrero de 2016

Investment strategies: Long Short Equity

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When making our investments we have multiple options to put our money to work depending on our investment style and the risk we are willing to assume.

For those investors who are willing to tolerate some exposure there are a number of alternative investment strategies to more traditional investment approaches that seek to achieve positive returns regardless of market developments. Among these strategies we have one called Long Short Equity strategy, widely used in the world of hedge funds.

The implementation of this strategy is simple, and consists of creating an investment portfolio with long and short positions.
A long position is a traditional investment, ie, it is to buy shares of a company waiting for the price to rise and/or behave better than the market average.

Meanwhile, a short position is one in which you borrow shares of a company paying interest to sell them hoping the stock price goes down and/or behave worse than the market average. Later these shares are purchased at a cheaper price, if they have indeed fallen, and returned to whoever had lent them, to obtain a benefit.

Most often when you follow this type of strategy when investing is to do it by creating a market neutral portfolio.

A neutral portfolio is a portfolio that consists of the same number of long positions and short positions, so the evolution of this portfolio is not subject to the evolution of the market as a whole, but the portfolio will generate profits if the analysis made in the selection of the assets that compose it is correct.

Therefore, the risk that exists in this type of strategy is closely linked to the manager's ability to properly select the components of the portfolio, so that when you invest through a mutual fund is crucial analyze how long the current management team have been in charge of the fund, the past performance and what is the profitability relative to other funds in the same category.

How can we implement this strategy?

After seeing the main features of  this type of investment strategy, now the question is how an individual investor can carry out this type of strategy propperly, in the case this approach is appropriate for their objectives.

One of the simplest ways through which we can apply this long short strategy is by buying securities that  we believe undervalued (long positions) and short selling securities that we believe overvalued (short positions).

Many investors are unaware of the ways to open a short position in a security, but the truth is that there are several ways to do it. It can be done through products such as warrants, options, futures, CFDs or ETFs. Even some brokers give the possibility to sell shares short.

Another way to implement this strategy is by taking long and short positions based on the forecast we make on the evolution of the stock markets in different geographical areas.

For this we can use the ETF as an investment vehicle. If we consider that the stock market in a given geographical area will go up, we can buy an ETF that invests in this market; while if we consider that in another geographic area the stock market will go down, we can get a short position by an inverse ETF.

However, the easiest way to invest in this type of strategy for the retail investor is by buying shares of a fund which applies this investment strategy.

The absolute return funds, for example, are a type of mutual funds that invest in the market through long short strategies seeking positive returns regardless of how the market behaves ..

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