Hedge Funds and the Long/Short Strategy

Many hedge funds regularly employ the long/short strategy in their investment portfolio. This type of strategy was designed to limit the overall risk of investing in stocks. Here are the basics of the long/short strategy and why hedge funds utilize it so often.

Long/Short Strategy

One of the traditional problems with investing in stocks is that you never know which direction the market will go in the short term. While the stock market always tends to trend upward, individual stocks can bottom out and provide no return. When you are in control of a large portfolio, such as a hedge fund, you can minimize this risk using the long/short investment strategy. 

With this type of investment strategy, you are actually going to be buying an equal number of shares with a short position as you will for a long position. This means that regardless of which way the price of the stock goes, you will be protected. You will make a certain amount of money and you will lose a certain amount of money with each movement. This ensures that your capital will be protected in your trading account. This type of strategy usually involves higher fees because of the increased management that is required.

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