Sector long/short strategies exploit the opportunities presented by certain sectors—in particular, those in which company specifics, rather than market trends, largely determine stock performance. The benefits of this approach include:
This strategy targets sectors in which individual stocks have relatively low correlations with each other. A large dispersion of returns among stocks in a sector creates opportunities for managers to maximize the impact of their stock picks. Using both long and short positions enables managers to invest according to their assessment of individual securities.
The potential to profit from both winners and losers: Using both long and short positions allows managers to generate positive returns from both opportunities and challenges facing individual companies within the sector.
Upside capture with downside protection: Careful stock selection and use of short positions can help protect investors’ capital during broader declines within the target sector.
Low correlation:The strategy’s returns are not tied to broad market swings, so sector long/short can help diversify an equity portfolio.