Many retail investors are conditioned to believe that a long-only approach is the best strategy. They often think that when equity markets decline, the best course of action is to either raise cash or increase exposure to fixed income. However, professionals adopt a different approach, utilizing long/short strategies to navigate market fluctuations.
Thanks to the rise of ETFs, this investment concept is now more accessible to a wider range of ordinary investors. One notable example is the Unlimited HFEQ Equity Long/Short ETF (HFEQ), which aims to democratize long/short investing. Launched in July by Bob Elliott’s Unlimited ETFs, HFEQ could serve as a timely addition to the ETF landscape.
“As market volatility persists due to inflation, Central Bank policies, and other economic concerns, investors may be looking for ways to enhance the resilience of their portfolios. This may be an ideal time to explore the risk-mitigating characteristics of long-short equity strategies,” according to Morgan Stanley.
HFEQ Has Advantages
While many investors are familiar with taking long positions in securities, fewer understand the potential profitability of shorting select stocks. However, shorting can be a complex endeavor, often requiring margin borrowing or precise timing with put options. Additionally, there is the risk of unlimited losses if a short position goes against the investor.
Long/short strategies like HFEQ alleviate these challenges. They offer investors several benefits, including portfolio protection and reduced volatility. “As the name suggests, long-short equity strategies invest both long and short in publicly traded equities and equity-related instruments. Compared to their long-only counterparts, long-short strategies are designed to exhibit lower sensitivity to equity market movements, as measured by beta, volatility, and drawdowns,” Morgan Stanley explains.
Moreover, a long/short ETF like HFEQ has two channels for generating profits: its long and short positions. In contrast, long-only funds can only appreciate when the underlying securities increase in value.
HFEQ is actively managed, a crucial aspect when combining long and short positions within a single fund. This management style provides essential oversight, ensuring that investors receive guidance in navigating the complexities of long/short investing. Furthermore, HFEQ could serve as a protective measure if equity markets experience sudden downturns.
“During the bear markets of 2000-2002 and 2007-2008, as well as the downturns in mid-2011 and late-2018, the tumultuous beginning of 2020 due to the COVID-19 pandemic, and the bear market of 2022, long-short equity strategies, as measured by the HFRI Equity Hedge (Total) Index, successfully mitigated downside risk relative to broader markets across various metrics,” Morgan Stanley concluded.
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