Equity Long-Only Defined


What is Equity Long-Only Investments?

There is a strong connection between Equity Long-Only Investments and Hedge Funds. Where the latter has always been in search of new and more risky investment opportunities, the former becomes a means to fulfill this demand for more risk-more return. While understanding the Equity Long-Only investment option, it should be kept in mind what a Hedge Fund is and how it reacts to risky investments.

Hedge Funds are not groups of average investors, looking to make profits. These companies are investment vehicles that pool resources from highly sophisticated personalities and businesses- those who have access to very sensitive and critical information regarding the equity-trading floor. Therefore, they are more than ready to take up new challenges in an effort to add some complexity and variety to their investment portfolios.

Equity Long-Only Investment Strategy

Equity Long-Only is a particular investment strategy adopted by many Hedge Funds today. As explained in the previous post, a Long position signifies a buying stance while a Short position means an investor is ready to sell securities. In this light, Equity Long-Only means Hedge Funds and other institutional investors are only buying equity- and not selling any. However, is that even possible?

Investment pundits are divided over the feasibility of Equity Long Only Investments. While the Long-Only Equity strategy does work, it may take years to deliver results. Most believe that for a Hedge Fund to ‘hedge’ or protect against losses, it has to sell no matter what. Here, the idea in force is that being in a Short position ensures that losses are minimized and market exposure is limited.

The logic behind Equity Long-Only is that the more risky an asset, the more it will pay off at a later date. So if Hedge Funds are to retain a long position for all risky assets, they will end up earning a lot of return. However, the timing of when this return is earned is up to chance- or better yet, up to the fate of the investment market. Experts who believe a mixture of long and short should be adopted assert that many investors do not have the patience to wait for years before seeing returns on their investments.

Is Equity Long-Only Any Good?

Nonetheless, those who support the Equity Long-Only strategy give a number of benefits that result from it. According to experts, a Long-Only Hedge Fund has more flexibility and room for adjustments in its portfolio. Since short positions can hardly ever be made profitable, if the market has decided otherwise, being long-only gives room for improvement over time.

Benefits of long-only Equity Funds

Long-only equity offers various advantages to the investors. Usually the long-only equity investments can be easily benchmarked, which makes the evaluation of these investments simple and straightforward. Another great benefit of long-only equity funds is their high liquidity; long-only equity funds hold high liquidity assets and securities with an option to redeem anytime. In addition, these funds offer great transparency as compared to other kinds of funds available to the investors. In addition, large corporations can use long/short equity funds through individual accounts to gain substantial benefits.

Risks of long-only Equity Funds

The major risk associated with the long-only equity investments is that they are highly volatile in nature, especially in certain market conditions such as market crisis or downfall. During decreased economic activity, these funds can produce low returns for a prolonged time period.

Moreover, it is a common belief in investment circles that because Long Only Hedge Funds charge very high fees when compared to regular investing firms, their remuneration is also quite high, which is obviously credited to their staunch long position in risky assets. With a long only stance, Hedge Funds can target certain growth sectors in the economy, without creating a benchmark for market risk.

Despite the advantages, critics have targeted the long only approach by saying that it makes Hedge Fund Management more dormant because unless the long position turns around, there isn’t much managers can do. This management stands in stark contrast with that of a Hedge Fund that is run with the long/short strategy.

This critique may well be true because one of the major disadvantages of Equity Long-Only is a very inactive Fund, which is waiting to reap returns from risky investments.

The Future of Equity Long Only

Not every Hedge Fund you come across has a Long-Only investment strategy and the few that do have faced serious concerns regarding the future of this approach. Is it here to stay or will it be on its way out soon? Especially in volatile markets, the use of these equity funds is highly challenged.

However, despite these concerns, Equity Long-Only investments have become very popular among Hedge Funds and other institutional investors because they result in absolute profits, provided the investment matures as expected.

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Equity-Long Short Defined