Long/Short Funds: Strategy, Risks, and Notable Examples

Long/short funds, alternatively termed enhanced or 130/30 funds, are financial instruments blending attributes of mutual and hedge funds. This strategy entails the simultaneous adoption of both long (buy) and short (sell) positions in securities within a defined market segment. this comprehensive exploration aims to provide finance industry professionals with a nuanced understanding of long/short funds, elucidating their strategies, associated risks, and real-world examples featuring top-performing funds such as ICON and RiverPark.

Long/short funds pursue augmented returns by actively managing long and short positions in securities from a targeted market segment. Employing diverse active management techniques, these funds may leverage instruments like derivatives and short positions. While these strategies offer potential for increased returns, they concurrently elevate both the fund’s risks and potential total returns.

While bearing similarities with hedge funds in their pursuit of higher returns and increased risk compared to standard benchmarks, long/short funds differentiate themselves. They generally exhibit higher liquidity, shorter lock-in periods, and lower fees than their hedge fund counterparts. However, it’s essential to note that long/short funds, despite having more regulatory oversight, still maintain higher fees and less liquidity compared to traditional mutual funds.

Long/short funds present an intriguing option for finance professionals seeking targeted index exposure coupled with active management. The strategy affords the advantage of hedging against market fluctuations and trends, allowing for increased adaptability. A prevalent approach involves adopting a 130-30 strategy, wherein the manager is long 130% and short 30% of assets under management. This strategic mix optimizes exposure to top-performing stocks while mitigating risk through short positions.

The 130-30 strategy involves meticulous stock ranking within the S&P 500 based on expected return, considering various data sources and selection criteria. Top-ranked stocks receive a 100% investment, while bottom-ranked ones are short-sold, comprising up to 30% of the portfolio’s value. The cash generated from short sales is then strategically reinvested into top-ranked stocks, optimizing exposure to potentially lucrative investments.

Performance within the realm of long/short funds exhibits annual variability, emphasizing the importance of thorough due diligence. ICON and RiverPark serve as notable examples of top-performing long/short funds, offering insights into their distinctive investment strategies.

The ICON Long/Short Fund, with a year-to-date performance of 25.96% as of Dec. 1, 2017, adopts the S&P 1500 Index as its benchmark. Utilizing quantitative analysis, the fund identifies undervalued and overvalued securities, strategically establishing long positions in undervalued stocks and short positions in overvalued ones.

The RiverPark Long/Short Opportunity Fund, boasting a return of 24.07% year to date as of Dec. 1, 2017, employs a proprietary investment process. This process aids in identifying undervalued and overvalued securities, maintaining transparency in its portfolio holdings. The fund focuses on U.S. equities across various market capitalizations, including the possibility of investing in foreign equities.

No, long/short funds cater to a broader audience, including individual investors seeking targeted exposure with some active management. They offer advantages such as increased adaptability and hedging against market changes.

Long/short funds, being more closely regulated than hedge funds, adhere to restrictions on the use of leverage and derivatives. This regulation aims to mitigate risks and maintain market integrity.

Yes, long/short funds, like the RiverPark Long/Short Opportunity Fund mentioned earlier, may invest in foreign equities. This diversification allows for exposure to a broader range of opportunities.