YOUR PORTFOLIO
/ LONG/SHORT /
THE LONG AND
THE SHORT OF IT
You can access long/short strategies through absolute return funds,
but are they worth the risk? Daniel Lanyon finds out
T
HE HIT 2015 FILM
THE BIG SHORT laid
bare the benefits of
short-selling to a
mainstream audience
of millions. However, while it
shows eccentric fund manager Dr
Michael Burry, played by
Christian Bale, using short
positions to clock up a return of
close to 500 per cent in the
financial crisis, the everyday
reality of these products isn’t
quite so spectacular.
Shorting is an investment
strategy in which you bet against
a security rising in value. It can
result in a positive return when
others are seeing their portfolios
plummet, a welcome hedge for
other investments when markets
are in full-blown chaos.
It is usually carried out using
derivative instruments, where
the investor effectively borrows
a stock to sell with the objective
of returning it when the price
has fallen and profiting from
the difference in value. Long/
short funds invest in both
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“short” positions – a bet against
appreciation in an asset – as well
as “long” positions – the more
normal type of investment that
will appreciate when the price of
a security goes up.
These portfolios usually aim
to make modest yet consistent
gains with smoother performance
than traditional funds and tend
to be uncorrelated to the broader
market.
NO GUARANTEE
They are also designed to be more
robust during market turmoil.
However, there is no guarantee
these funds will meet their aims
and losses from short positions can
be massive and may even exceed
the value of the original investment.
Whereas these strategies
were once the preserve of
hedge funds used by high
net worth individuals, Gavin
Haynes, managing director of
Whitechurch Securities, says
they can now be accessed by
retail investors. The IA Targeted
Absolute Return sector, for
example, contains many funds
that use long/short positions.
“The main benefit [of these
funds] is you are not a hostage to
fortune of market performance,
as long/short fund managers aim
for a positive return irrespective of
market direction,” said Haynes.
“These funds are the epitome of
active management and good fund
managers can add value. But each
fund must be treated on its own
merits as the returns achieved will
– in theory – largely be driven by
that manager’s ability, rather than
by underlying economic or market
performance.”
DIFFERENT STROKES
Despite sharing a similar
objective, funds of this type
vary considerably in terms of
investment approach and asset
type, warns Rob Morgan, pensions
and investment analyst at Charles
Stanley Direct. They also differ in
terms of the amount of risk taken,
with some aiming to eke out
modest returns, while others are
prepared to be more aggressive.
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