As many clients know from painful experience, share funds can suffer losses quickly. That was certainly the case during the GFC when sharemarkets around the world sank. Historically, the best way for investors to stay afloat as sharemarkets fell was to have kept some of their money in bond funds or cash. However, long-short funds offer another alternative. These funds can offer share fund-like returns with lower volatility, and can behave differently to both shares and bonds.

Long-short funds use a strategy called short-selling, in addition to simply taking ‘long’ positions by buying shares in anticipation of rising prices. ‘Shorting’ is a way to make money when share prices fall. To do this, the fund manager borrows stock and sells it with the intent of buying it back later at a lower price if it falls – gaining from the difference.

By design, long-short funds can behave differently from other investments in a portfolio. Shorting enables these funds to make gains even when individual stocks or the overall market slumps, or at least decline less than other share funds. Meanwhile, long-short funds also take traditional ‘long’ positions, which allow them to participate in market rallies. The combination of both ‘long’ and ‘short’ positions can have a stabilising effect on returns, making the funds less volatile than the overall sharemarket.

Perhaps most importantly, the returns of long-short funds don't correlate with long-only shares or bonds. This enables them to reduce overall portfolio risk.

Perpetual uses long-short strategies in the Perpetual SHARE-PLUS Long-Short Fund. For more information please read the product disclosure statement.