Long-Short Stock Investing Strategy

Long-short or long/short is a stock investing strategy followed by many hedge funds, portfolio managers and individual investors. The strategy was introduced in late 1980s. Long-short stock investing includes buying (taking long position) stocks which are assumed to perform high and selling (taking short position) stocks which are assumed to perform low, than early ones. Theoretically this is a risk-free investing strategy, as long as both positions are of same size.

With long-short investing strategy, irrespective of the market performance, the investor/fund will benefit as long as the stocks which he purchased outperform the stocks he sold. Although investors can buy any stock (doing well) and sell any stock, many follow a ‘paired trade’ model to limit risks. Often the pair involves same/related industry stocks. In this way investors can limit the risk to only their selection of stocks rather than industry/market performance.

In practice long-short investing strategy is a high-risk strategy, as a great amount of risk is associated with stock selection and short selling. Many funds and portfolio manages follow complex rules and strategies to evaluate individual stocks and companies, and to find good opportunities. Long-short strategy is favorable only to portfolios which are actively managed and frequently/seasonally readjusted.

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