Long/Short Fund: Meaning, Overview, Examples

What Is a Long/Short Fund?

A long/short fund is a mutual fund or hedge fund that takes both long and short positions in investments from a specific market segment. These funds use alternative investing techniques such as leverage, derivatives, and short positions to buy undervalued securities and sell overvalued ones. Long/short funds may also be called enhanced funds or 130/30 funds.

Key Takeaways

• Long/short funds use an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares.
• Long/short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both undervalued and overvalued.
• Long/short equity is commonly used by hedge funds, which often have a relative long bias—for example, a 130/30 strategy where long exposure is 130% of AUM and 30% is short exposure.

Understanding Long/Short Funds

Long/short funds seek to enhance returns in a specific market segment by actively taking both long and short positions in securities. These funds use active management techniques to determine portfolio holdings and may also use leverage, derivatives, and short positions, increasing the risks and potential returns.

Long/short funds are similar to hedge funds, offering greater risk and return potential compared to standard benchmarks. They have higher liquidity and lower fees than hedge funds but still higher fees and less liquidity than most mutual funds. They are more regulated than hedge funds and have limitations on leverage and derivatives.

Long/short funds can be a good investment for targeted index exposure with some active management. They also provide hedging against changing market environments and other trends.

The most common long/short strategy is to be long 130% and short 30% of assets under management. An investment manager ranks stocks based on expected return, using data sources and rules for selection criteria. The manager then invests in top-ranked stocks and short sells bottom-ranking ones, reinvesting the cash into higher-ranking stocks.

Examples of Long/Short Funds

Long/short fund performance varies, and the best funds in one year may lag in another. Two top-performing funds in 2017 were ICON and RiverPark, although they lagged in 2020. These funds provide insight into what long/short funds do.

1. ICON Long/Short Fund: The ICON Long/Short fund had a year-to-date performance of 25.96% as of Dec. 1, 2017. The fund invests in all equity securities traded in the U.S. market, using the S&P 1500 Index as its benchmark. It uses quantitative analysis to identify undervalued and overvalued securities, taking long positions in undervalued stocks and short positions in overvalued stocks.
2. RiverPark Long/Short Opportunity Fund: The RiverPark Long/Short Opportunity Fund had a return of 24.07% year-to-date as of Dec. 1, 2017. The fund uses a proprietary investment process to identify undervalued and overvalued securities and has a transparent framework for its portfolio holdings. It invests in U.S. equities across all market capitalizations and may also invest in foreign equities. The fund buys undervalued companies and takes short positions on overvalued ones, holding 40 to 60 long positions and 40 to 75 short positions.