Many novice investors make the decision to invest in a hedge fund without first educating themselves on the many types of strategies available. One of the most common is the long-short equity. Investors pledge positions in high-performing funds as collateral, which shores up finances on shorter funds that have a proclivity for losing. Diversifying the portfolio pays off, as investing in the short funds mitigates the long fund’s market exposure.
Long-short equities come with little risk. Market-neutral hedge funds pose even less of a threat. These funds target zero exposure by looking for short and long funds with equal market value. Consequently, investors stand to generate a return based solely on their selection of stocks. However, expected returns are lower, which stands to reason, as there is significantly less risk involved.