Long/Short Equity
A directional equity strategy that takes simultaneous long positions in undervalued securities and short positions in overvalued ones, seeking to profit from idiosyncratic stock selection while hedging some portion of broad market risk.
Details
- aliases: L/S Equity, Equity Hedge
- category: equity
- child strategies: equity-market-neutral, sector-specialist, fundamental-l-s, quant-l-s, activist-short
- investment thesis: Fundamental and/or technical analysis can identify mis-priced equities; pairing longs with shorts isolates stock-specific (idiosyncratic) alpha while reducing exposure to broad market beta.
- edge source: Differentiated fundamental research, behavioral mispricings, accounting forensics, channel checks, expert networks, and dispersion in single-stock returns.
- typical holding period: 1-12 months, with both core and trading sleeves common
- drawdown profile: Drawdowns typically driven by factor reversals (momentum crashes, low-volatility unwinds) and short-squeeze episodes. Peak-to-trough commonly 8-20%.
- correlation to equities: 0.5
- correlation to bonds: 0.0
- liquidity profile: monthly
- instruments used: common stock, ADRs, ETFs, single-stock options, index futures
- asset classes: equities
- primary risks: short-squeeze risk, factor crowding, borrow availability and recall risk, regulatory short-selling bans, concentration risk
- key metrics: Sharpe ratio, alpha, long-short attribution, gross/net exposure, factor exposures, hit rate, win/loss ratio
- notable practitioners: Julian Robertson (Tiger Management), Lee Ainslie (Maverick), John Griffin (Blue Ridge), Stephen Mandel (Lone Pine)
- exemplar funds: lone-pine-capital, viking-global, tiger-global, maverick-capital
- related terms: alpha, beta, short-selling, stock-borrow, pair-trade, factor-investing, fundamental-analysis, long-short-equity
- related strategies: equity-market-neutral, activist-short, global-macro
- academic foundations: Fama-French (1992) three-factor model, Carhart (1997) momentum, Grinblatt & Titman (1989)