Investing in Hedge Funds, Revised and Updated Edition

CHAPTER 12

Equity Hedge

EQUITY HEDGE, also known as long/short equity, combines core long holdings of equities with short sales of stock, stock indexes, or derivatives related to equity markets. Net exposure of equity hedge portfolios may range anywhere from net long to net short, depending on market conditions. Managers generally increase net long exposure in bull markets and decrease net long exposure (or may even be net short) in bear markets. Generally, the short exposure is intended to generate an ongoing positive return in addition to acting as a hedge against a general stock market decline. Stock index put options or exchange-traded funds are also often used as a hedge against market risk.

In a rising market, equity hedge managers expect ...