Content provided by Grant Engelbart, CLS Portfolio Manager
The world of alternative investments is vast, and often times a little blurry. A good place to start when thinking about alternatives is a fairly simple idea – buy stocks you like, sell stocks you don’t. This is the general premise for a long/short strategy. Since, in many cases the only assets you need for a long/short strategy are individual stocks; they fit nicely into the category of “liquid” alternative, and can be implemented fairly easily inside of an ETF. A few examples:
The basic idea here is to buy a specific amount of stocks, and sell an equal amount short, to effectively create “zero” market exposure, or zero beta. Returns are earned by buying better stocks than you sell short
130/30 or Short Extension
Instead of targeting a zero market position or zero beta, this strategy targets a beta of 1. For instance, you buy an index with 100 stocks, and sell short 30 of them that you don’t like. With the proceeds from the short sell, you add the money to 30 stocks you do like. Your net position then becomes equal to the market.
Long/Short – Long Bias
A very similar idea to the market neutral strategy, except instead of a zero market position/beta, the fund tends to have a position that tilts towards the long side. Maybe 20%, 40%, or 60% market exposure. Sound familiar? Enhanced income is a long/short fund with a long bias!
Why use long/short funds? These funds/strategies are generally great additions to a balanced portfolio as they are less correlated and less volatile than traditional equities. Market Neutral funds are absolute returns strategies that seek to generate returns in any market environment. This strategy is used across many CLS strategies, especially in our active strategies.