GlossaryStructures

What is long/short equity?

Long/short equity is a hedge fund strategy that buys shares expected to rise and sells short shares expected to fall, so gains can come from both and the shorts offset part of the market's swings.

In practice

Most such funds lean net long, so they still rise and fall partly with the market. A market-neutral fund balances its longs and shorts closely to remove most market exposure, and some also neutralise factors such as company size or momentum. Net exposure, longs minus shorts, shows the market bet; gross exposure, longs plus shorts, shows how much leverage the fund uses.

An example

Round numbers, not a real fund

Say a $100 million fund holds $120 million of shares and is short $70 million. Its net exposure is 50% of capital and its gross exposure is 190%. Simple example. Terms vary by fund.

Why it matters

It is one of the most common hedge fund strategies, and how much market risk it leaves depends on the balance between longs and shorts.

Video

36 seconds, with sound

A definition, not advice; where usage varies the entry says so.

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Related terms

Hedge fundA hedge fund is a pooled fund that mostly trades liquid securities, often using short selling, borrowing and derivatives, and lets investors add or withdraw money at set intervals.
Short squeezeA short squeeze happens when a rising share price forces investors who bet against a stock to buy it back, and their buying pushes the price higher still.
High-water markA high-water mark is the highest value an investor’s stake has reached, and a manager earns no performance fee until the stake is back above it.
Margin callA margin call is a broker’s demand for more cash or collateral when a position bought with borrowed money falls below the required level.

The terms, in the news each morning.

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