The S&P 500 eked out a measly 1.4% total return for 2015. While this figure may seem low, the positive performance was mainly driven by a few of the larger names such as Microsoft (+22.5%), Disney (+12.9%), Amazon (+117%), and Alphabet Inc. – formerly known as Google (+44.5%). This gave rise to a divergence between the performance for some of the larger names in the S&P 500 and some of the smaller names in the S&P 500. This disconnection of performance can make a strong case for some of these names being overvalued while others in the S&P 500 are undervalued due to their poor performance.
This is where a long/short manager can come in handy. These types of portfolios allow the manager to have the flexibility to go both long and short various stocks (a long position in a stock will profit if the stock price rises while a short position will profit if the stock price declines). This type of portfolio can provide value to an investor when certain market situations arise such as the one mentioned above.
In addition to having the ability to take advantage of certain market dislocations, long/short portfolios can also reduce risk in one’s portfolio. Giving the manager the flexibility to take short positions (i.e. profit from a decline in stock prices) can provide positive returns when other equity components of the portfolio are declining or remain flat.
These strategies can be very complex. If you would like to see how these solutions can fit into your portfolio please contact a member of our wealth management team.