The fund manager’s ability and experience of the fund management team influence performance of a long-short fund, said a report by PMS AIF World, a research-backed wealth management firm.
The report said that while the overall growth prospects for the economy and capital markets remain positive, the last 20 months have taught that stock market investing can go through frequent ups and downs with sharp movements affecting individual sectors and stocks. This gives an opportunity on the long side as well as the short side.
The report highlighted 3 risks associated with all types of long-short funds. Let’s look at these risks:
a) Directional trading long-short funds, which are looking to generate returns by predicting and timing the market direction, are exposed to risks of fund manager’s directional calls. A trending market will favour such a strategy, while range-bound or choppy markets could hurt returns.
b) Long - Short funds with long bias are funds where longs are more than the shorts. These are prone to market risk, where any weakness in market hurts returns. Additionally, these are exposed to stock selection risks, i.e. which stocks the fund manager chooses to buy and/or sell determines the returns.
c) Equity market neutral long short funds balance the long and short positions. Here, market direction risk (or systemic risk) is lowest, but still the fund remains exposed to the stock selection risk, which is also the main driving factor for the fund.
The report suggests that long trades and short trades both could be winners if the fund managers take the right call.