Long Short Mutual Fund Description

By Author: Jamie Hanson
Total Articles: 3534
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It's always interesting to learn more about new investing strategies and to give various methods a try to see their returns. One particular strategy is the long short mutual fund strategy. This particular strategy is one that combines two types of investments, both long and short, to limit exposure and risk. The goal involves picking a variety of stocks with both long and short positions to include in the fund. The long positions are expected to improve their value while the short positions are expected to lose some of their value. At first, this might not sound like a very good investing strategy. Who would want to invest in a fund that includes positions that are expected to lose from the get go? The answer to that is that while the short positions may lose while the market is going up they will gain when the market is on its way down, meaning the losses of the long positions will be made up for by the gains of the short positions. Investors tired of the market's volatility and of losing their hard earned money may be especially receptive to the long short mutual fund because it is essentially a fund with insurance built in. ...
... There is no guarantee of success, of course, which is the inherent risk of investing in the stock market. However, the stocks chosen for the fund are done so in order to reduce risk and exposure as much as possible.

What are Long and Short Positions?
The investor needs to understand the difference between a long and short position. Basically, a long position may be taken simply by purchasing a stock and if it goes up in value the investor makes money. Short positions are somewhat different, however. In many cases taking a short position involves borrowing a stock from your broker, selling it, and then hoping it goes down in value so that it can be re-purchased at a lower price than was initially paid so the "borrowed" share can be returned. That's an example that is simplified to assist in the understanding of how the long short mutual fund works. There are generally 20-30 long stocks and 30-40 short stocks within one fund that work to balance each other and make money for the investor.

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