Long-short funds are popular investment strategies employed primarily by hedge funds, where managers take both long and short positions in equities. This dual approach allows them to profit from stocks they expect to rise (long positions) while also benefiting from stocks expected to decline (short positions). Typically, long-short funds aim to reduce overall portfolio risk by hedging long positions with short positions. These funds can cover various market capitalizations, but a majority of them focus on large-cap equities, offering liquidity and stable returns.
Key Characteristics of Long-Short Funds
On average, long-short funds demonstrate strong risk-adjusted returns, with an average Sharpe ratio of 0.64 across various funds, indicating that these funds deliver decent returns relative to the risk taken. The average maximum drawdown for long-short funds is around -9.88%, showing how much a fund could lose from peak to trough during difficult periods. In terms of fund longevity, the average history for the top long-short funds spans 5.8 years, indicating that these strategies have been tested across several market cycles.
Investors can expect annualized returns of approximately 9.92% from long-short funds, demonstrating their potential for steady performance. Moreover, these funds employ leverage to enhance returns, with an average leverage of around 116%, meaning that managers typically use borrowed funds to increase their exposure to both long and short positions. This can amplify gains, but also increases risks.
Performance Highlights: Best and Worst Performing Funds
When diving into specific funds, Point72 stands out as one of the best-performing funds, boasting an average annual return of 13.5%. Its strategy of leveraging large-cap U.S. equities, combined with well-managed long and short positions, makes it a strong performer. In contrast, Waratah Performance, a Canadian mid-cap equity fund, has the lowest average return at 7.5%, highlighting the challenges of navigating more volatile mid-cap stocks.
From a risk perspective, First Trust Long/Short ETF (FTLS) is one of the least risky funds, with a Sharpe ratio of 0.71 and a relatively modest max drawdown of 8-5.2%. This shows that FTLS manages risk effectively while still providing reasonable returns. On the other hand, Bridgewater Associates, despite being a renowned hedge fund, has a max drawdown of -15.2%*, indicating a higher level of volatility in its long-short strategies.
In terms of leverage, Viking Global and Maverick Capital employ more aggressive strategies, with leverage ratios of 130% and 125% respectively, allowing them to capitalize on both long and short opportunities. In contrast, First Trust Long/Short ETF maintains a more conservative leverage of 100%, which may explain its lower risk profile.
This exploration of performance metrics highlights the breadth of strategies within the long-short fund space, showing that while some funds consistently outperform, the level of risk and return can vary significantly depending on the market approach. Long-short funds offer investors an attractive balance between return and risk, profiting in both rising and falling markets.
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