Hedge Fund Investment Strategies
Long-short equity is a popular hedge fund strategy where in which the manager initiates both long and short positions in the portfolio. The exact strategy or substratgey the manager uses will be proprietary and the percentage of longs and shorts will differ with each manager.
Long/Short Equity substrategies
Long/Short Equity hedge funds may be one of the more broad investment strategies and many managers will name a focus within the strategy. For example some long/short funds will concentrate on specific groups of equities within certain countries, regions, industries, and/or capitalizations. Long short managers may also focus on other investment approaches such as event driven, a core-satellite approach or even the recently popular 130/30 strategy.
Longs and Shorts
Generally each manager will name the specific factors that they look for when making long and short investments. For long positions we often hear about undervalued securities and fundamental analysis on those securities. Managers often talk finding companies which are strong and have good management as well as companies with opportunity for growth. For short positions we see manager’s discussing overvalued stocks. Managers find overvalued stocks through examinations of the company’s balance sheet, cash flow, and return on equity. Weak fundamentals and out of favor sectors are often cited sources for potential shorts.
Many times managers will identify potential long and short positions through fundamental analysis. Fundamental valuation may consist of “bottom-up” or “top down” analysis or a blend of the two. Technical analysis is also oftentimes used. Many times the long/short manager will be a “stock-picker.”
Typically investment objectives are to achieve attractive absolute returns. Many funds also have as a stated investment objective that the program be uncorrelated to the general securities markets. Many funds will seek to achieve the objective over longer investment time horizons to capture potential long term capital gains.
As the name suggests, the long/short equity fund will typically invest in common stocks which are publicly traded on the major stock exchanges. Some funds may venture into the OTCBB markets (although these funds are usually identified as microcap or pink sheet funds). In addition to equities, many funds will trade other instruments, for hedging purposes or otherwise, including: preferred stocks, debt instruments, cash equivalents, options on securities or indicies, forward contracts, related futures contracts, derivatives. [HFLB note: managers should discuss all potential instruments the fund may purchase; if the fund invests in futures it may need to be registered as a Commodity Pool Operator with the CFTC.]
Risk Management for Long/ Short Hedge Funds
Hedge fund managers should discuss their risk management procedures when creating an investment program. For long/short hedge funds it is common to see the manager discuss the following issues:
- value at risk (VAR) monitoring
- asset allocation restrictions (industry, region, etc.)
- leverage/ margin
- how do you decide when to exit a losing investment?
- particular position (at time of investment, or at any time)
Start a long/short hedge fund today
Long/short hedge funds can be up and running in as little as three weeks depending on the manager and the program (which may or may not require investment advisor registration). Our experienced attorneys can assist you with any questions you have about starting your life settlement hedge fund. Please contact us to start your fund.
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