Long-short equity combines purchases of stocks expected to outperform with shorts expected to underperform. Net market exposure can be positive, negative or near zero. Gross exposure matters even when longs and shorts nearly offset: both sides can lose if stock selection fails or financing becomes expensive. Equity market neutral seeks to control market beta, which requires more than matching dollar amounts. Dedicated short bias benefits from falling stock prices but faces borrow costs, recalls and potentially unbounded short losses.
Global macro takes positions in rates, currencies, equities or commodities based on economic views. It can be discretionary or systematic. Managed futures commonly implement rules across futures markets, including trend-following strategies. Trends can produce useful crisis diversification in some episodes, while rapid reversals or sideways markets cause losses. Neither the macro label nor a low historical correlation guarantees protection in the next crisis.
Relative-value strategies buy an apparently cheap instrument and sell a related expensive one. The spread can widen before it converges, and financing can disappear before the investment thesis pays.
Common mistakes
- Calling convertible arbitrage short volatility. A standard long-convertible hedge has an option component with positive gamma, while retaining important credit and financing risks.
- Equating low net exposure with low leverage. Offsetting long and short positions can have large gross exposures and cash demands.
- Treating an offshore feeder as tax immunity. Structure addresses particular investor needs; actual tax and investor-protection consequences require the relevant terms and jurisdiction.
Bottom line
- Strategy hedges remove selected exposures while leaving basis, credit and financing risks.
- Gross leverage, common counterparties and crowded exits connect fund losses.
- Domicile, incentives and independent controls answer different diligence questions.
- Private credit exchanges customized financing for limited liquidity and opaque valuation.
Exam shortcut
Identify what each hedge actually offsets and name a risk it leaves behind. For private-market performance, write paid-in capital, distributions, remaining NAV and dates in separate columns. Use multiples for value and realization, dated cash flows for IRR and a stated index method for PME. Check liquidity capacity before interpreting a yield pickup as an attractive allocation.
The full lesson (about 4,628 words, 31 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
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