Understanding long-short equity strategies

Long-short equity is the foundational strategy behind most SIFs launched so far in India. Understanding a few core concepts makes it much easier to read a scheme's factsheet.

Gross exposure vs. net exposure

• Gross exposure is the sum of long and short positions (as a percentage of assets), regardless of direction. A fund with 80% long and 40% short has 120% gross exposure.
• Net exposure is long minus short. The same fund has 40% net exposure — meaning it behaves, on average, like a fund that is 40% invested in the market.

Two funds can have very different risk profiles even with similar headline "equity allocation" numbers, depending on their net exposure.

Why hedge at all?

A well-constructed short book can:

• Cushion drawdowns during broad market corrections
• Let the manager express a relative view (long Stock A, short Stock B in the same sector) rather than a purely directional one
• Reduce reliance on the overall market direction being right

What can go wrong

• Hedging cost — shorts (especially index futures) carry a cost of carry that can drag on returns in strongly rising markets
• Basis risk — a short index position doesn't perfectly offset a long stock-specific position
• Concentration — a small number of large short positions can still be a significant risk if the trade goes the wrong way

When comparing SIFs on SIFIndia.com's SIF screener, look at both the return numbers and the portfolio disclosure's asset-type breakdown (long vs. short vs. cash) to understand how much net market exposure a fund is actually running.