The underlying idea of his fund was to control the market risk. Returns have two main sources and depend on the manager’s security selection ability to buy and sell stocks. Leverage is usually used to magnify fund returns. The majority of long/short managers base their stock selection on fundamental analysis and typically use various valuation methodologies (discounted cash flow, free cash flow, etc.).
They also frequently take historical prices into account for entering and getting out of positions (technical analysis may be used to determine the timing). Every single long/short manager tries to identify undervalued longs, overvalued shorts, and predict market direction to determine the funds’ growth and net global exposure.
As the number of long/short funds increases, many funds become specialized in certain specific markets. Some funds invest only in specific sectors and certain regions, or even use market capitalization when selecting stocks. Some managers are value driven while others focus on growth or combine the two.
Many U.S. equity hedge managers focus strictly on various U.S. markets and the strategy. Both the long and the short books combine market risks, industry risks, and security risks but the unwanted market and industry risks can be hedged, leaving the global portfolio with some market and industry risks that depend on the views of the portfolio managers and a larger portion of security risk.
|U.S. Equity Hedge|