Strategy Profit or Loss and Exposure Reporting
Every type of long and short equity fund buys securities on margin to create leverage and almost always sells securities short in some combination that is designed to meet their specific strategy and individual trade or the positioning objectives of the fund. Each trade or position in the fund generates a profit or loss based on the change in the value of the security bought or sold short. Rising prices result in profitable long positions, and falling prices result in profitable short positions. The opposite is also true: Falling prices result in losses on long positions, and rising prices hurt short positions.
Each long position held in a portfolio can also result in a dividend income payment being received and a financing charge being incurred. Each short position in a position in a portfolio can result in a dividend being paid to the lender of the shares from whom the fund borrowed and a fee or a rent being paid for the short-term use of the borrowed security, both of which are fund expenses. Interest income is earned on the short sale proceeds, and in some cases, it can also generate proceeds that may be used to pay down any borrowing associated with a securities purchase.
The generic process of calculating portfolio and fund income, gross and net exposures, expenses, and returns for all long and short equity fund styles is essentially the same.
A mark to market gain or loss and realized gain or loss on closed positions need to ...