Long-short strategies

Hi - I was hoping that someone would be able to explain the purpose of long short strategies to me. I get the idea of entering into a long-short position will reduce systematic risk. But, then… why would you want to reintroduce it with a futures contract or by buying more shares of the ones you’re already long? Surely, that takes you back to square one of being long the stock? I have a feeling that I’m getting horribly confused here and any help would be appreciated! Thanks.

I thought long-short allows you to now take advantage of over-price securities whereas long-only, you can only go long undervalued securities (or sell existing positions in over-priced securities). With shorting, you can take advantage of, well, shorting.

When you say the long-short position will reduce systematic risk, is that necessarily true? A pure long position with a beta of 1 should have the same level of systematic risk as a 130/30 strategy that nets out to a beta of 1.

It sounds like Banjee is talking more about portable alpha (which can utilize a long-short to add alpha). Generally the idex that is added is for a different market. For instance, say you think the Japanese market is going to go bananas this year and you know a very good long-short manager in the US. you can hire the long-short manager to provide active management of the portfolio and add that to an index fund following the Japanese market. This may be preferable to getting both your alpha and beta from the US market alone.

Ah, makes sense!

I’m a dullard and feeling more so every day the exam nears… Thanks, FinNinja. Much appreciated!

shorting shitty companies allows you to get more long. if the market goes up 2% and your shorts went 0% for the year, you win. how do you safely introduce leverage into a portfolio and take advantage of an investment capability that mutual funds cannot perform, so that you can justify your inflated hedge fund performance fees?