When most Australians think about investing in shares, they picture the simple strategy of buying a company’s stock and hoping it goes up. That’s called taking a “long” position – you profit when the share price rises.
But there’s another side to investing: the ability to “short” a stock. Shorting means borrowing a share, selling it at today’s price, and then buying it back later at (hopefully) a lower price. If the share falls, the investor makes money on the difference. If it rises instead, the investor loses money.
Simple examples
Long example: You believe Woolworths is well-placed to benefit from steady grocery demand. You buy Woolworths shares at $30, and if they rise to $35, you pocket a gain.
Short example: You think an expensive tech company is over-hyped and trading at $50. You borrow the shares and sell them. If the price falls to $40, you buy them back cheaper, return them, and keep the $10 difference.
A long/short equity fund combines both approaches. It invests in companies it believes will grow (long positions) and at the same time “shorts” companies it expects to underperform.
Benefits of long/short investing
More ways to generate returns – Traditional share funds can only make money if the market goes up. Long/short funds can potentially profit in both rising and falling markets.
Better risk management – By offsetting long positions with shorts, the fund can reduce the impact of broad market swings. This may mean smoother returns over time compared to being 100% exposed to market ups and downs.
Access to specialist insights – Fund managers who run long/short strategies often have strong research capabilities. Their ability to pick winners and avoid (or profit from) losers can provide extra value beyond a plain index fund.
Portfolio diversification – Adding a long/short fund to a traditional mix of shares, bonds, and property can improve diversification because returns may behave differently from the overall share market.
Risks to consider
Complexity – Short selling isn’t as straightforward as buying shares. It involves borrowing, margin requirements, and potentially higher costs.
Higher risk of losses – When you buy a share, the worst outcome is it goes to zero. With a short, losses can be unlimited if the share price rises sharply instead of falling.
Reliance on manager skill – The success of a long/short fund depends heavily on the manager’s ability to correctly identify which stocks will rise and which will fall.
Costs – These funds can have higher fees than traditional managed funds due to the complexity of trading and borrowing.
What this means for everyday investors
Long/short funds aren’t designed to replace traditional investments, but they can be a useful addition in a well-diversified portfolio. They provide exposure to a broader set of opportunities, with the potential to deliver returns in both good and bad markets.
If you’d like to explore whether a long/short fund could make sense in your portfolio — and how it might fit alongside your existing investments — reach out to us for a conversation.