Long-Short Equity
What Is Long-Short Equity?
Long-short equity is an investing strategy that takes long positions in stocks that are expected to rise in price and short positions in stocks that are expected to decline. A long-short equity strategy seeks to minimize overall market exposure, while profiting from both stock gains in the long positions, as well as the short positions.
The long-short equity strategy is very popular with hedge funds, many of which employ a market-neutral strategy, in which dollar amounts of both long and short positions are roughly equal.
In fact, the long-short equity strategy is probably the oldest hedge fund strategy. It was established by the legendary Alfred Winslow Jones, who created the first widely recognized hedge fund in 1949.
Compared to their long stocks only counterparts, long-short strategies are designed to have lower sensitivity to overall stock market movements, which translates to less volatility and smaller drawdowns.
When included as part of a broadly diversified portfolio, this strategy has the potential to provide an element of risk mitigation, or hedge, when markets decline because the gains on short positions will somewhat offset losses on long positions.
Long-short complements traditional long-only investing, as it takes advantage of opportunities to profit from stocks identified as undervalued and overvalued.
Broadly speaking, there are two types of long short strategies. These include:
Market neutral which uses strategies aimed at minimizing sensitivity to outside market volatility. This strategy seeks to eliminate the impact of broad market movements by trading related stocks, such as two stocks from the same industry, on a long and short basis.
Extension strategies which utilize long and short investing, while aiming to provide 100% net exposure to the underlying market. The leverage for these types of strategies can vary, with the most common being 130/30 – that is 130% weighting in long positions and 30% weighting in short positions within the same portfolio. The extension strategies tend to provide greater diversification to the portfolio.
Why Invest Using a Long-Short Equity Strategy?
In theory, the “asymmetric return” profile makes a long-short fund one of the best ways to compound wealth for the long term. Basically, it lowers the risk of substantial losses and opens-up upside opportunities for equity-like returns.
For investors, there are several potential benefits of this strategy.
The first is portfolio diversification. This is because managers buy stocks they expect to outperform the market, while taking short positions in assets they expect to underperform. This expands the investment universe, offering the potential for a more diversified portfolio while still retaining a degree of correlation with equity markets.
Another benefit is the potential for excess returns. Long short strategies rely less on rising markets. However, because the funds include short positions, there’s also the potential for significant losses.
History gives us evidence that this strategy usually works when the market is not doing so well.
During the bear markets of 2000-2002 and 2007-2008, the down markets of mid-2011 and late-2018, and the chaotic beginning of 2020 (as the COVID-19 pandemic unfolded), long-short equity strategies broadly, as measured by the HFRI Equity Hedge (Total) Index, and market-neutral strategies more specifically, as measured by the HFRI Equity Market Neutral Index, achieved their goal of mitigating downside risk relative to the broad market.
For example, in the 2000 to 2002 period, the HFRI Equity Hedge (Total) Index gained 23% and the HFRI Equity Market Neutral Index gained 4%. Meanwhile, the MSCI World Net index lost 42%.
History tells us that since 1997, there have been five years where the S&P 500 Index produced negative returns. During those same five years, a long/short equity strategy led to stronger returns by experiencing only 21.54% of the downside. In other words, investing in a long/short equity strategy provides the potential for a ‘smoother ride’ over time for your portfolio.
However, the performance of long-short equity funds does depend on the acumen of the manager running the long-short equity fund.
Through mid-May 2022, Goldman Sachs estimated that long-short funds had lost 18.3% in 2022. The reason was that many funds’ longs were invested in the riskier corners of the stock market, including loss-making technology companies.
How to Invest Using a Long-Short Strategy
There are a number of funds and ETFs available to retail investors that offer access to this long-short equity strategy. For a look at these investment alternatives, check out www.magnifi.com and use their AI-assisted search function by typing in ‘long-short’.
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The information and data are as June 9, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Uranium
Uranium (chemical symbol U) is a silvery-white metallic chemical element with atomic number 92. A uranium atom has 92 protons and 92 electrons, giving it the highest atomic weight of all naturally occurring elements.
Discovered in 1789 by German chemist Martin Klaproth in the mineral pitchblende, uranium was initially used as a colorant for ceramic glazes and for tinting in early photography. Its radioactive properties were not recognized until 1896, and its potential for use as an energy source was not manifested until the mid-20th century.
Uranium was found to be radioactive in 1896 by Antoine H. Becquerel, a French physicist. This was the first instance that radioactivity had been studied and opened up a new field of science. Marie Curie coined the term radioactivity shortly after Becquerel’s discovery, and with Pierre Curie, continued the research to discover other radioactive elements, such as polonium and radium, and their properties.
Today, uranium is used to power commercial nuclear reactors at about 440 nuclear power stations that produce electricity and to produce isotopes used for medical, industrial, and defense purposes around the world. About 10% of the world’s electricity is generated from uranium in nuclear reactors. This amounts to over 2500 terawatts each year, as much as from all sources of electricity worldwide in 1960.
Uranium is commercially extracted from uranium-bearing minerals such as uraninite. Uranium ore can be mined from open pits or underground excavations. The ore can then be crushed and treated at a mill to separate the valuable uranium from the ore. Uranium may also be dissolved directly from the ore deposits in the ground (in-situ leaching) and pumped to the surface.
Uranium mined from the earth is stored, handled, and sold as uranium oxide concentrate (U3O8). Before it can be used in a reactor for electricity generation, however, it must undergo a series of processes to produce usable fuel. For most of the world’s reactors, the next step in making the fuel is to convert the uranium oxide into a gas, uranium hexafluoride (UF6), which enables it to be enriched.
Australia has the world’s biggest uranium resources, accounting for 28%. Kazakhstan ranks second in terms of resources with 15%, but the country is the world’s top uranium producer. Kazakhstan accounted for roughly 40% of global uranium output in 2020.
Why Invest in Uranium?
To many, uranium and nuclear power is part of the answer in the transition away from fossil fuels.
That’s why the metal was resurgent in 2021, rising by more than 30% to a level not seen since 2012. And in March 2022, uranium prices surged to their highest level since the nuclear disaster in Japan’s Fukushima plant in 2011.
However, it is worth remembering that uranium is not traded on a formal exchange like many other commodities, but rather buyers and sellers negotiate privately. The New York Mercantile Exchange (NYMEX) recently began offering a uranium futures contract.
In looking at the fundamentals, the World Nuclear Association released The Nuclear Fuel Report: Global Scenarios for Demand and Supply Availability 2021–2040 in September 2021. The report forecast uranium demand from the world’s nuclear reactors was expected to rise to 79,400 metric tons of elemental uranium in 2030 and 112,300 tons in 2040. In 2021, global uranium demand from nuclear reactors was estimated at 62,500 tons.
On the supply side, however, global uranium production plunged to 47,731 tons in 2020 from 63,207 metric tons in 2016 due to a prolonged price depression – thanks to Fukushima – which discouraged exploration activities. Additionally, the Covid-19 pandemic in 2020 also restricted uranium production.
The global supply/demand picture points to even higher prices ahead. For example, the past several years of minimal contracting leaves utilities with significant uncovered fuel requirements beginning in 2023. Since it takes up to two years to transform uranium ore into fuel pellets, utilities should spend 2022 aggressively seeking to secure their uncovered fuel requirements for 2023 and beyond.
There is also the investment side to the uranium story. An exchange traded fund (launched in July 2021) that invests in physical uranium began stockpiling so much of the metal that there were fears it could corner the market and choke off supplies to power stations.
How to Invest in Uranium
In summary, nuclear power has been accepted by many as a necessary element of the global decarbonization process and an important part of the global energy mix for the foreseeable future.
That makes uranium a viable investment. You can participate in this market either through purchasing uranium mining stocks or exchange traded funds (ETFs).
These ETFs may either hold uranium miners or physical uranium. You can find these ETFs easily by searching at www.magnifi.com and typing in “uranium”.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as June 7, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.