Using long-short funds to manage volatility
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Andrew Buchan is a partner with financial advice and accountancy firm HLB Mann Judd.
In the continuing aftermath of the global financial crisis, many experts are predicting shorter economic cycles, potentially lower economic growth, and more frequent bouts of volatility.
Investors need to adjust their approach to suit these changed global market conditions and manage volatility.
There are now a number of investment options available to investors and one that is of increasing interest is "long-short" equity funds.
A long-short fund is a managed investment fund that aims to profit from both rising and falling share prices, whatever the market conditions, by using different strategies to buy stocks.
Put simply, taking a "long" position in a stock means buying it in the belief that, over time, the stock will increase in value, and make money for investors.
In fast-moving sharemarkets, however, today's gains can be washed away by tomorrow's losses.
If stockmarket rallies, followed rapidly by downswings, become the norm then traditional "long-only" investment techniques may be inadequate.
This is where "short-selling" comes into play. This technique means fund managers borrow a stock they don't own from a third party (usually another institution or broker), and then sell it on the market.
The intention is to then buy it back after an anticipated decline in value, pay off the loan to the third party, and make a profit from the remainder.
The combination of "long" and "short" positions can help stabilise investment returns, and funds that incorporate both approaches tend to be less volatile than the overall sharemarket.