Equity and Event Strategies · Hedge Funds

A long and short equity strategy combines ownership of selected shares with positions designed to benefit when other shares decline. The two books need separate analysis.

Two sources of profit and loss

A long position gains when its share price rises, ignoring dividends and costs. A conventional short sale involves selling borrowed shares and later acquiring shares to return. Its price gain comes from repurchasing at a lower price. Borrowing costs, dividend compensation and trading expenses can reduce the result.

A short position can lose more than its initial sale proceeds because a share price has no fixed upper limit. Borrow can become expensive or unavailable. The manager can be forced to close a position before the investment thesis has time to work.

Calculate the contribution

Take a fund with $100 of NAV, $120 of long exposure and $60 of short exposure. Suppose the long book gains 8% and the prices of the shorted shares fall 5%. The long contribution is $9.60 and the short price contribution is $3. Total price profit is $12.60 before borrowing, financing, fees and other costs.

Now reverse the short outcome: the shorted shares rise 15%. That produces a $9 loss on the short book. If the long gain remains $9.60, the net price profit is only $0.60. A good result on the long side does not establish that the complete strategy performed well.

Investigate selection and exposure

Ask how much return came from overall market direction, sector choices and individual stock selection. A portfolio can carry a positive net exposure and therefore benefit from a rising equity market even when its stock selection adds little. Net exposure also misses differences in volatility and sensitivity across holdings.

Review concentration, crowded shorts, borrow availability and position sizing. A short based on weak earnings differs from one used to offset market exposure. Both can be useful within a mandate, but they create different failure modes and should not be grouped together without explanation.

Try it yourself

A $100 NAV portfolio holds $90 long and $40 short. Long prices rise 4% while shorted prices rise 6%. What is the price contribution before costs?

Show the worked answer

The long book earns $3.60 and the short book loses $2.40. The combined contribution is $1.20, or 1.2% of NAV, before all costs and income adjustments.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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