he Equity Long/Short managers hedge at least some portion of their market exposure with short sales or exchange-traded futures and options. Historically, Equity Long/Short managers have tended to have a net long market exposure. The primary economic sources of return to the Equity Long/Short strategy (beyond merely holding dividend-generating or otherwise appreciating assets) derive from four characteristics that distinguish them from a traditional long-only strategy:

 

1. The ability to hold illiquid assets and capture the corresponding risk premia;

2. The ability to effectively employ short positions;

3. The ability to utilize financial instruments (e.g. options, OTC derivatives) not readily available to traditional long-only money managers; and

4. The flexibility to take advantage of inefficiencies in various segments of the equity markets because they are not required to follow specific benchmarks.

 

As a result, Equity Long/Short managers may derive returns beyond those of traditional equity-based money managers by holding asset positions and by bearing types of risks that long only equity managers are less willing or otherwise unable to assume. Further, Equity Long/Short managers are able to evolve through time to take advantage of new opportunities that arise because of advances in securities lending, financial innovation, and changes in regulations.