Long/short strategies beneficial to investors

Investors’ demand for downside protection has fuelled a surge in Australian shares long/short strategies, according to a Zenith Investment Partners report.

The rise in these strategies was additionally supported by a prolonged bull run in equity markets, followed by investors’ concerns about a possible market correction.

According to Zenith, over the year to March 2018 the amount invested in its rated Australian shares long/short strategies grew by 43 per cent to $8.7 billion, while over the past four years this segment has increased 78 per cent.

The firm also pointed to short selling and its growing appeal to investors, especially in times of market uncertainty, as it allows investors to profit when stocks or markets drop.

Additionally, when comparing long/short funds and traditional long-only funds, the analysis found that long/short funds captured 92 per cent of the market’s upside return, and when markets dropped, they managed to provide a much higher degree of downside protection.

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Also, the long/short funds suffered only 57 per cent of the market’s decline, compared to 86 per cent for long-only funds.

Therefore, the outcome of the analysis clearly proved that long/short strategies could play a potentially beneficial role in investors’ portfolio, Zenith Investment analyst, Jacob Smart, said.

“It is also important to recognise that short selling is a specialised skill set that we assess carefully when rating funds,” he said.

“The ability to short sell effectively is a key determinant of success in the overall strategy.”