Risk and Return: Which Strategy Is Safer?
When evaluating whether long-short funds are less risky than long-only, it’s crucial to consider both market exposure and volatility. Long-only funds are fully exposed to market downturns, making them vulnerable during corrections or crashes. Their performance is directly tied to the market index, which can be a double-edged sword.
Long-short funds mitigate this risk by balancing long and short positions. This hedging mechanism reduces net market exposure, potentially lowering volatility. In India, where geopolitical events and policy shifts can trigger sudden market movements, this strategy offers a layer of protection. However, it’s not risk-free. Poor stock selection or incorrect short calls can lead to losses.
Return expectations also differ. Long-only funds may deliver higher returns in bull markets due to full exposure, while long-short funds aim for consistent, risk-adjusted returns across cycles. This makes them suitable for conservative investors or those nearing financial goals.
Ultimately, the true difference lies in risk appetite and investment horizon. Long-short funds offer a sophisticated tool for managing risk, but they require trust in the fund manager’s expertise. Long-only funds are simpler and more transparent, making them ideal for beginners or passive investors.