Risks of Long/Short Equity Strategies

Medium Hedge Fund Strategies Equity Hedge

In the context of hedge fund strategies, particularly within equity hedge funds, investors often seek to manage risks while capitalizing on market opportunities. One of the primary approaches used in equity hedge strategies is the long/short equity strategy.

Suppose a hedge fund identifies two stocks, Stock A and Stock B. Stock A is expected to outperform the market, while Stock B is anticipated to underperform. The fund manager decides to take a long position in Stock A and a short position in Stock B. This strategy aims to generate positive returns regardless of overall market movements.

Which of the following statements correctly describes the potential risks associated with this long/short equity strategy?

The strategy may incur high management fees which can diminish overall returns.

The strategy is immune to any market-related risks since it involves both long and short positions.

The performance of the long position is directly affected by the performance of the short position.

Hint

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