What are long short investment funds and how do they work?

Understand how long short investment funds work

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Long-short investment funds are some of the investment and operation possibilities that the financial market offers.

However, to understand how long short funds work and what the main advantages and disadvantages are, it is first necessary to better understand this strategy.

With this in mind, in this article, we will explain the subject in more detail. Continue reading to understand more.

What are investment funds?

Investment funds are a type of collective financial application.

They pool resources from several investors, who delegate investment decisions to the fund's professional manager.

The profits obtained from the investments are divided among the shareholders, in proportion to the amount deposited by each of them.

Basically, it works like this: imagine that an investor invests a certain amount in a stock fund. In addition to him, other investors will also invest in that fund.

The sum of all resources constitutes the fund's net equity.

It is important to remember that each investment fund has regulations, which define some rules on how the manager can act.

For this reason, before opting for a particular fund, it is essential that the investor knows the main characteristics of the investment, so that he can choose the most suitable ones. suited to your profile and their strategies.

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What is long and short?

Long means “bought”, while short means “sold”.

The focus of the operation is to obtain profits through the relationship between the difference in prices of such assets.

Therefore, it is the process of purchasing a share, at the same time as selling another security.

In this strategy, The trader does not necessarily earn as much from the purchase as from the sale. The main objective of the practice is to have a positive balance in the result of the operation.

What are long short investment funds?

Long and short funds are investment funds that focus on buying one asset and selling another practically simultaneously.

The objective, in this case, is to profit from the appreciation of one and the depreciation of another. In other words, the profit comes from the moments of increase or decrease of a financial asset.

Long short is an arbitrage operation (purchase and sale operation of an asset aiming for profit) between two assets that have a correlation with each other.

In practice, long short occurs when the investor buys one of the assets (long) and when he sells another (short).

As they are correlated, the stocks may have similar, but not the same, movements.

This means that the manager operates both long (betting on an increase in the value of assets, when sold (betting on a fall in prices).

The gain from the operation lies precisely in the difference in performance that the assets suffer in times of high or low market conditions.

This is because generally, one of the assets always appreciates or depreciates more.

The advantage, in this case, is that the allocation of resources is carried out by a professional manager.

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Which assets can be part of the long short fund?

Long short funds generally operate with shares.

The important thing here is to choose assets that have a correlation.

Regarding the most commonly used methods for forming asset pairs, we can mention:

• Ordinary and preferred shares of the same company

• Shares of controlled company x controlling company

• Companies in the same sector

• Intersectoral (assets that are not from the same sector)

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What are the types of long short funds?

There are some significant differences in the operation of long short investment funds.

This means that this type of fund can be of two different types. See what they are:

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Neutral long short background

Neutral funds operate with long and short positions, however, with a financial position limited to 5%.

They are considered more conservative, therefore, risk control normally results in lower returns.

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Directional long short funds

Unlike neutral funds, directional funds carry out operations with long and short positions without exposure limits.

Therefore, they are considered more aggressive, since the objective is to maximize the profits of the operation. Therefore, the risks are also greater.

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Differences between long biased funds and long short funds

They are different strategies, although both can be used by managers.

Long short funds operate with one end bought and the other sold, while long biased funds tend to operate bought.

The long bias generally gives preference to profit from the appreciation of shares. However, operations can be carried out to take advantage of moments of decline.

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What are the main advantages?

One of the main advantages is the possibility of obtaining profits even in a market downturn scenario..

Furthermore, performance is not affected by Ibovespa Index (main stock market indicator in the country).

After all, as the focus of the strategy is to profit from the difference in acquisition and sale values, the idea is to find overvalued and undervalued assets, so that it is possible to create the correlation.

Therefore, it doesn't really matter if the stock market is falling.

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What are the disadvantages?

The main disadvantage is the risk that the expected performance will not be achieved..

In fact, this operation also requires more active management from the manager. Therefore, there is a possibility that the administration fee will be slightly higher.

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Is it worth investing in a long and short fund?

When it comes to investing, there is no way to tell which option is best.

This strategy, as you can see, can be a bit complex, especially for beginners.

For this reason, if you want to invest in this type of fund, it is essential that you know how it works.

Also, remember that there are certain risks involved. First of all, understand your investor profile, set financial goals and study the investments that seem most suitable to your profile.

Conclusion

Long short investment funds operate with a bought and a sold leg.

Regardless of the strategy used in this type of fund, always assess whether it is suitable for your investor profile and financial objectives.