Chapter 5

Long and Short Equity Strategies

The long and short equity style of hedge fund management is one of the most popular styles of hedge fund investing. This style comes in many shapes and sizes. The style benefits from being similar to traditional long-only investing, and the managers in this space use many of the same tools for evaluating opportunities, constructing portfolios, measuring performance, and evaluating risk as those used in traditional equity investing.

The long and short equity strategy of hedge fund investing also has a long history. In fact, the first person credited with setting up a hedge fund in the United States, Alfred Winslow Jones, ran a long and short equity strategy. A Fortune magazine writer, Alfred Winslow Jones created the first modern-day hedge fund in 1949. In the next 20 years, he turned $100,000 into $4.8 million, with a cumulative return of under 5,000 percent. Imitators followed Jones's equity long and short methods, and by 1968, the SEC counted 140 investment partnerships that had similar traits as hedge funds. The financial crash of 1973–1974 wiped out many of the equity long-short hedge funds, and the Jones partnership dramatically decreased from an AUM of $100 million in the late 1960s to $25 million a decade later.

In the early days of hedge fund investing, the vast majority of investor flows went into global macro funds. While the 1970s and 1980s saw growing interest and awareness of hedge funds, it wasn't until the late 1990s that ...

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