Basics of the Long/Short Hedging Strategy
23 September, 2020 | ZebPay Trade-Desk
Introduction to Long/Short Strategy
About Long/Short Strategy
A long/short strategy is an investment strategy that hedge funds employ frequently. It involves taking long positions in assets whose value is expected to increase and short positions in assets that are expected to decrease in value. Put another way, hedge fund managers take long positions on assets they believe to be undervalued, and go short on assets that seem overvalued.
Long Position: If the asset increases in value, an investor will profit from it.Short Position: If the asset declines in value, an investor will profit from it.
Ideally, the long position will increase in value, and the short position will decline in value. If this happens, and the positions are of equal size, the hedge fund will benefit. However, the strategy works even when the long position declines in value, provided the long position outperforms the short position. Thus, the aim of a long-short strategy is to reduce market risk exposure, and gain from the spread between two assets on which a position has been taken.
The concept is simple: Investment research helps to identify potential winners, and losers. So why not diversify, and bet on both, and reduce your exposure?
Long/short strategies exploit profit opportunities in both potential upside and downside expected price moves.