Many retail investors are conditioned to believe that long only is the way to do things. They think that when equity markets retreat, the appropriate courses of action are to raise cash or increase fixed income exposure. Professionals do things differently, including deployment of long/short strategies.
Thanks to ETFs, that concept is more accessible to a broader swath of ordinary investors. Count the newly minted Unlimited HFEQ Equity Long/Short ETF (HFEQ ) as one of the ETFs democratizing long/short investing. Courtesy of Bob Elliott’s Unlimited ETFs, HFEQ debuted in July and could be an example of a well-timed rookie ETF.
“As market volatility continues due to inflation, Central Bank policy, and other concerns, investors may be seeking ways to add resiliency to their portfolios. It could therefore be an opportune time to consider the inherently risk-mitigating characteristics of long-short equity strategies,” according to Morgan Stanley.
HFEQ Has Advantages
While investors are obviously familiar with being long on securities, some are aware shorting select stocks can be lucrative. However, it’s a tricky endeavor for many market participants. It can involve margin borrowing or needing to get the timing right with put options. Plus, there’s the specter of unlimited losses when a short bet goes awry.
Long/short strategies like HFEQ eliminate those burdens. Meanwhile, it provides end users with other benefits, including portfolio protection and avenues through which to reduce volatility.
“As the name suggests, long-short equity strategies invest both long and short in publicly traded equities and equity-related instruments. Compared to their long-only counterparts, long-short strategies are designed to have lower sensitivity to equity market movements, as measured by beta, volatility and drawdowns,” added Morgan Stanley.
Plus, a long/short ETF like HFEQ has two avenues through which profits can be accrued: its long and short positions. Meanwhile, long-only funds only appreciate when the underlying securities increase in value.
HFEQ is actively managed — a highly appropriate if not necessary management style when combining long and short positions under a single umbrella. Said another way, there’s nothing wrong with a little bit of hand-holding in the long/short. HFEQ provides that. The new ETF could also provide protection if equity markets suddenly tumble.
“During the bear markets of 2000-2002 and 2007-2008, the down markets of mid-2011 and late-2018, the chaotic beginning of 2020 as the COVID-19 pandemic unfolded, and the 2022 bear market, long-short equity strategies broadly, as measured by the HFRI Equity Hedge (Total) Index, and market-neutral strategies more specifically, as measured by the HFRI Equity Market Neutral Index, achieved their goal of mitigating downside risk relative to the broad markets across a variety of metrics,” concluded Morgan Stanley.
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