Long/short equity
Long/short equity is an investment strategy generally associated with hedge funds. It involves buying equities that are expected to increase in value and selling short equities that are expected to decrease in value. This is different from the risk reversal strategies where investors will simultaneously buy a call option and sell a put option to simulate being long in a stock. Typically, equity long/short investing is based on "bottom up" fundamental analysis of the individual companies, in which investments are made. There may also be "top down" analysis of the risks and opportunities offered by industries, sectors, countries, and the macroeconomic situation. Long/short covers a wide variety of strategies. There are generalists, and managers who focus on certain industries and sectors or certain regions. Managers may specialize in a category — for example, large cap or small cap, value or growth. There are many trading styles, with frequent or dynamic traders and some longer-term investors. A fund manager typically attempts to reduce volatility by either diversifying or hedging positions across individual regions, industries, sectors and market capitalization bands and hedging against un-diversifiable risk such as market risk. In addition to being required of the portfolio as a whole, neutrality may in addition be required for individual regions, industries, sectors, and market capitalization bands. There is wide variation in the degree to which managers prioritize seeking high returns, which may involve concentrated and leveraged portfolios, and seeking low volatility, which involves more diversification and hedging. This is in addition to market neutral strategy, as it adds a permanent stock index futures overlay, which makes profit or losses, depending on the movement of the market. Your portfolio then has a full equity market exposure. A hedge fund might sell short one automobile industry stock, while buying another—for example, short 1 million of Ford.