Long Short Mutual Fund Basics

By Author: Jamie Hanson
Total Articles: 3495
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The long short mutual fund is simply a mutual fund that uses hedge fund trading strategies. The difference of long short mutual funds versus the average mutual fund is that they use short positions in addition to leverage and derivatives to try to maximize returns no matter what the market conditions are. There are laws that control how many short positions and derivatives may be used in a long short mutual fund, so there are controls governing how successful these funds can be. The majority of investments in a long short mutual fund are in stocks so there are certainly risks out there.

Why Invest in a Long short mutual Fund?
Many investors are unaware of the long short mutual fund and don't know why it would be beneficial. Basically, a long short mutual fund is the method created by the mutual fund industry to offer the average investor hedge fund advantages. The advantage the long short mutual fund has over a traditional hedge fund is that the fees are generally lower and there is no lock in period that applies. On the other hand, the fees associated with the long short mutual fund will be higher than the majority ...
... of mutual funds and liquidity is also lower.

The long short mutual fund is different from mutual funds as well on the minimum investment front. In most cases investors will need to invest a minimum of $1,000 or more. Not every long short mutual fund has this much of an investment requirement, but many do. On the other hand, the short fund can't include as many short positions, derivatives, and leverage as the hedge funds are allowed to. Nevertheless, investors will find the long short mutual fund diversifies their portfolio when the market is down.

Of course, today's investors are wary of putting all their eggs in one basket, so to speak, and diversification truly is necessary to reduce the chances of losing everything in a volatile market. Luckily, investors taking advantage of the benefits of the long short mutual fund will be able, in principle, to make money when the market is both up and down.

Keep in mind the long short mutual fund is a recent innovation. However, many investors and fund managers are hopeful that this type of investment will play out the way everyone hopes it will. Time is the only way to find out whether the long short mutual fund is worthy of its newfound popularity.

Long Short Mutual Funds as part of a balanced investment portfolio can help reduce risk and increase alpha.