Longshort

Long-short is an investment approach that combines taking long positions in assets believed to be undervalued with short positions in assets believed to be overvalued. The objective is to earn returns from the price movement of individual securities (alpha) while limiting exposure to broad market movements (beta). Managers may apply the strategy within a single asset class, commonly equities, or across multiple classes.

In practice, a long-short portfolio seeks a balanced or target net exposure, such as market-neutral or slight net long. Long positions aim to capture appreciation in undervalued stocks, while short positions are used to hedge risk and profit from overvalued stocks. The strategy often relies on fundamental or quantitative analysis, or a combination, and may employ leverage and shorting availability to enhance returns. Transaction costs, borrow costs for shorting, and regulatory constraints influence implementation.

Variants include market-neutral long-short, where net beta is near-zero; sector-specific or global-long-short; and stat-arb or pairs trading, which focus on relative value within themes. The strategy is widely used by hedge funds and some asset managers seeking diversified sources of return uncorrelated with broad market indices.

Risks include model risk, high turnover, liquidity risk, borrow costs, short squeezes, and the potential for large losses if relative valuations move unfavorably or if markets trend strongly. Performance depends on manager skill, research quality, and risk controls rather than overall market direction.

See also: hedge funds, market-neutral strategies, short selling, pair trading.