Global Perspectives: Exploring the dynamics of long-short equity strategies
In this episode, Portfolio Managers Ben Wallace and Luke Newman explore the complexities of long-short equity strategies, focusing on market rationality and risk management to achieve absolute returns.
Alternatively, watch a video of the recording:
1 minute listen
Key takeaways:
- Sophisticated risk management and careful portfolio construction in absolute return investing is vital to avoid being overly exposed to uncontrollable macro factors such as oil prices or US policy changes.
- Absolute return investing can benefit from market volatility as it presents tactical opportunities for entering or exiting trades based on a deep understanding of individual stocks and their exposure to various events.
- Absolute return investing offer investors diversification, low correlation to traditional asset classes, and flexibility to adapt quickly to changing market conditions.
Credit default swap (CDS): A form of derivative contract between two parties, used to manage the credit risk of a bond. The buyer makes regular payments to the seller, while the seller agrees to pay off the underlying debt if there is a default on the bond. A CDS is considered insurance against non-payment and is also a tradable security. This allows a fund manager to take positions on a particular issuer or index, without owning the underlying security or securities.
Global financial crisis (GFC): The global economic crisis from mid-2007 to early 2009 that began with losses related to mortgage-backed financial assets in the US and spread to affect financial markets and banks globally. Also known as the ‘Great Recession’.
Long/short: A portfolio that can invest in both long and short positions. The intention is to profit from combining long positions in assets in the expectation that they will rise in value, with short positions in assets expected to fall in value. This type of investment strategy has the potential to generate returns regardless of moves in the wider market, although returns are not guaranteed.
Correlation: How far the price movements of two variables (eg. equity or fund returns) move in relation to each other. A correlation of +1.0 means that both variables have a strong association in the direction they move. If they have a correlation of -1.0, they move in opposite directions. A figure near zero suggests a weak or non-existent relationship between the two variables.
Related insights
1 minute listen
Key takeaways:
- Sophisticated risk management and careful portfolio construction in absolute return investing is vital to avoid being overly exposed to uncontrollable macro factors such as oil prices or US policy changes.
- Absolute return investing can benefit from market volatility as it presents tactical opportunities for entering or exiting trades based on a deep understanding of individual stocks and their exposure to various events.
- Absolute return investing offer investors diversification, low correlation to traditional asset classes, and flexibility to adapt quickly to changing market conditions.