Fund managers hold both long as well as short positions by buying securities that they expect will perform and short selling the ones that they think will underperform. This is one of the more flexible and balanced strategies in managing a fund. As correlation to overall markets is low, so are the risks. There are two types of long-short funds:
This is often used to hedge against market movements. Although some consider this type of fund to be similar to long-short funds, market-neutral funds differ in that they have the same exposure to bullish and bearish positions (longs and shorts are balanced) – whereas long-short funds tend to tip towards being more long than they are short. As this type of fund aims to be zero beta, they are low-risk.
Convertible arbitrage funds
Another long-short strategy, this type of fund buys convertible securities (usually convertible bonds that can be converted into common stock) of a company and short sells its common stock – which differs from long-short funds that buy and short sell only stocks of different companies.