The Case for Long/Short Equity in Traditional Asset Class Construction

Abstract

Having noted that the number and variety of hedge fund strategies is particularly high, the author examines long/short equity strategies and their place in a balanced, diversified portfolio. In particular, the article focuses on the question of whether such strategies should be viewed distinctly from the broader hedge fund categories. The argument in favor of separating these strategies for other hedge funds is in large measure anchored in the fact that long/short equity portfolios tend to be more highly correlated to the broad equity market indices. The author concludes that categorizing these strategies alongside long-only and tracking error constrained equity processes should yield a more efficient asset class experience: lower deviations and higher returns.