In a BlackRock video produced for the Australian market, long/short equity investing is explored and contrasted to indexing and active long-only investing, which BlackRock describes as “the other means of investing in shares.” Indexing should allow investors to achieve returns consistent with the broad market, since their investments are “indexed” to the market itself. Investors who want to outperform the market can choose to actively buy and sell shares of stock, or to invest in a long-only mutual fund – however, while these strategies are potentially effective in bull markets, they tend to perform very poorly in bear markets.
Long/short equity investing, by contrast, includes the “short-selling” of shares, which allows an investor to profit from a stock’s price declines. Most mutual funds are restricted from short-selling, and there are many restrictions and regulations against individual investors doing it, as well. What’s more, short-selling carries a tremendous amount of risk, since a shorted stock can theoretically rise forever. For this reason, BlackRock recommends considering long/short equity funds, which benefit from rigorous oversight, institutionalized risk control measures, and the skill of professional investment managers.