Understanding Equity Hedge Strategies

Hedge funds employ various strategies to generate returns for their investors. One popular strategy is the equity hedge strategy, which typically involves long positions in undervalued stocks and short positions in overvalued stocks. Understanding the nuances of these strategies is crucial for evaluating hedge fund performance.

Consider the following scenario:

A hedge fund manager has identified a technology company, TechCo, as undervalued due to its strong growth potential, and decides to take a long position in TechCo. Meanwhile, the manager believes that a traditional manufacturing company, ManufacInc, is experiencing declining earnings and has been losing market share, thus deciding to short ManufacInc. Which of the following best describes the potential benefits and risks of employing this equity hedge strategy?