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Graham Macdonald MBMG International Ltd. Nominated for the Lorenzo Natali Prize |
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The Long and the Short of it
Long/Short funds are basically hedge funds where the fund
managers look for ways of beating the normal equity markets over a certain
period of time.
The basics are surprisingly easy. Good analysis and research should unveil
potential situations where there are winners and losers. Where the fund
tries to make money is by investing in both. This is one of the big factors
of a Long/Short fund as it allows managers to go both sides of the track.
What happens is that the Long/Short fund manager will buy ‘long’ positions
in stocks and shares which he/she reckon will go up in value but also
‘shorts’ positions where it is believed the purchase will go down in price.
Alternatively, they can offer a ‘hedge’ against a particular market or
sector risk. This is called the ‘Short book’.
This specific combination of ‘Long’ and ‘Short’ increases the possibility of
making more profit whilst reducing the risk factor. The theory is that
Long/Short equity funds aim for good margins without the volatility. They
are also able, via the “short book” they have, to show a negative view on
something or to hedge risk when things do get more volatile. This allows the
fund to miss out on the downside and take advantage of the upside.
Does this always work, absolutely not - just look at the likes of Long-term
Capital Management which, after a great start in the first three years (it
grew by over 300% after all charges in four years), managed to lose over
USD4.6 billion in four months due to the Asian and Russian Financial Crises
at the end of the 1990’s. However, there are excellent funds that do know
what they are doing. They will use a fundamental ideology or quantitative
analysis to help with investment choices.
The former can come in the shape of an individual who is responsible for
almost everything or a multi-manager, multi-strategy portfolio which will be
more diversified.
The latter will seek returns over all geo-political and sectoral areas and
study both the fundamentals and technicals before coming to a decision. In
fact some will only allow computers to analyse what is going on and so leave
the human element out of it all together. However, the normality of it is
that Long/Short fund managers are no different to others in that they do
nothing more than use their own experience, skill and hedging knowledge to
try to get the optimal growth possible. A good one though will be able to
reduce market exposure before any corrections thereby protecting capital and
producing growth over the long term.
Many indices have done well over the last decade or so, even accounting for
a couple of horrible years. However, many Long/Short strategy hedge funds
have even outperformed the indices and they have done this with less
volatility.
One more thing that makes Long/Short equity funds of interest to many people
is that they are usually very liquid thus allowing the manager to adapt his
portfolio quickly and, efficiently which will enable the fund to take
advantage of the upside and avoid the downside.
As stated above, the results of a Long/Short equity fund is down to the
management performance of the fund. The long and the short of it is that
everyone should have some exposure to these type of investment products in
their portfolio.
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
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