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The Case for Long/Short Equities

December 2022

Investing in Equities

Equities are well-known investments that have been a core holding in individual investor portfolios for decades. Over the last 25 years, equities (such as U.S. stocks), have provided investors with an average annual return of 8.5%. However, as the chart below illustrates, with this performance comes significant volatility. This has led investors to search for new opportunities that might allow them to better limit the downside while still participating in the return potential of the upside.

Growth of a Hypothetical $1,000 Investment

January 1, 1997 to December 31, 2022

Education - long/short equities

Potentially a Better Way to Diversify

A long/short equity strategy takes long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value. With this approach, an investor has the potential to capture much of the market upside while limiting downside loss. Since 1997, there have been five years where the S&P 500 Index produced negative returns. As shown in the chart below, during those same five years a long/short equity strategy presented a stronger return by experiencing only 20.47% of the downside. As a result of limiting the downside, investing in a long/short equity strategy provides the potential for reduced volatility.

Upside/Downside Capture January 1, 1997 - December 31, 2022
S&P 500:
202 Up Months
S&P 500:
110 Down Months
Long-Only Equity Average Annual Return3.37%Long-Only Equity Average Annual Return-4.07%
Long/Short Equity Average Annual Return1.48%Long/Short Equity Average Annual Return-0.83%
Capture Ratio43.81%Capture Ratio20.47%

Potential for Enhanced Risk-Adjusted Returns and Lower Volatility

History shows that long/short equity strategies have often outperformed the long-only S&P 500 Index in both bull markets and crisis periods. As shown below, long/short equities have achieved better risk-adjusted performance over market cycles than long-only strategies, with significantly lower volatility than long-only equity.

Chart showing long-only equity compared to long/short equity


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