How do I Choose the Best Long-Short Hedge Fund?

Those who want to select the best long-short hedge fund should look at a variety of factors including the costs, focus, and projected performance of the fund, as well as how a particular fund fits into an overall investment portfolio. Beginning investors can get a better chance of successful gains by learning how a hedge fund works, and which ones are most likely to compliment their investment strategies. In the world of funds, a long-short hedge fund offers an opportunity to get exposure to gains while limiting some of the risks of conventional stock trading.

One of the first things to look at in a long-short hedge fund, or any hedge fund, is cost. Experts who define hedge funds mention that these funds are generally “private investment partnerships” where the manager “co-invests” with clients. As these pros point out, this partnership doesn’t come without significant cost to the new partner, i.e. the individual investor. Hedge funds come with two possible price tags, a management fee and a performance fee. The management fee is often in the neighborhood of 1-2%, while a performance fee can be much higher.

Besides the cost of a long-short hedge fund, investors should look at whether the fund has a long or short “bias.” The way that long-short hedge funds limit risk is to invest in both long positions that benefit from gains in stock prices, and short positions that gain from declines. That way, whichever way the market swings, the investor can still realize value. The “bias” involves whether the fund has more invested in long positions of more invested in shorts, although most funds don’t ever really have a short bias. Funds that balance out exactly are called “market neutral.”

An investor can also look at “where” a long-short hedge fund invests. For example, some of these funds focus on stocks from emerging markets like the BRIC countries (Brazil, Russia, India and China) where analysts say big gains are likely over time. There are also differences in the sectors in which long-short hedge funds invest. All of this can make a difference in what long-short hedge funds fit a particular customer’s needs.

In a larger sense, picking the best long-short hedge fund involves looking at how fund managers handle the money that comes in, and how they can produce gains for customers. Some investors feel they are better off handling their own stock plays, but others like to rely on a hedge fund that they have fully inspected and found to have a sound underlying strategy and philosophy of finance. Read over fund reports carefully, and select those that fit your own hunches on where the gains are, as well as funds that correlate to your appetite for risk.