An investor will take long positions in securities that they believe will increase in price over time and short positions in ones that will deliver negative returns. For example, a hedge fund that has 75% of portfolio weight in long equities and 25% in shorts is “50% net long.”
Ultimately this would result in directional exposure to equity market risk as the short portfolio would not be able to fully hedge the long portfolio. A short portfolio can act as a hedge against market declines as well as provide alpha.
More importantly, investors will vary the amount of net exposure as the market conditions change. For example, net long exposure of long/short equity hedge fund managers varied from very lofty levels in 1999 and 2000 during a period of soaring stock returns and to very low levels in 2002 when stock returns were down beat.