Strategy at a Glance

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:

  • Superior risk-adjusted returns compared with passive approaches
  • Downside protection
  • Portfolio diversification

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.

  • The management team running the strategy must have deep experience with the sector in question, as well as experience managing long/short equity strategies.
  • The strategy must target a sector with a true opportunity for outperformance using long/short positions. Such opportunity occurs in sectors in which individual companies have wide dispersion of returns, or in which the sector is undergoing structural changes that create opportunities to identify potential winners and losers.

Test Your Knowledge

What do managers typically look for when selecting a sector to target with a long/short equity strategy?

Which is not a potential benefit of a sector-specific long/short equity strategy?

True or false: A sector-specific long/short equity strategy can earn positive returns from the sector’s winners and losers.

Which is an appropriate role for a sector-specific long/short equity fund in a portfolio?

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