Understanding Long-Short Funds: Strategy, Risks & Performance

The long-short fund is a fund that takes both long and short positions in the market. It was designed to provide investors with a hedge against any market condition. However, in most cases, this type of fund does not work well.

Why It Exists

The idea behind the long-short fund makes some sense. It was created so that regardless of whether the market goes up or down, the fund will not lose any money. This strategy is commonly used in many hedge funds, and mutual funds attempted to copy it.

Where It Fails

When mutual funds attempt to copy hedge funds, the results are usually less than perfect. Mutual funds cannot use the same techniques, like using large amounts of leverage, that hedge funds do. Therefore, their ability to make this type of investment strategy successful is lacking when compared to hedge funds.

This type of strategy also requires a lot of management on the part of the fund managers. This means that you will most likely have to pay larger expense ratios for this type of fund than you would with a traditional mutual fund.

This fund is also not very good at producing capital gains. If you have an equal bet on both directions in the market, you will lose as much as you win. This means that it is very hard to gain any ground financially with this type of strategy.