The Long and the Short of things

As the market currently on what seems like a day by day basis hits record highs, one has to wonder how long this record breaking bull run can last.

This chart plots the Australian All Ordinaries Index for the last 12 months (to 23 Feb 07). Apart from a couple of small blips, it's been all up hill since late September!

Now, if you're one of the increasing numbers who believes that there is only so long a run like this can go for and we're due for a correction, you might stick all of your money in cash until this correction happens.

However, investing in cash only provides you with limited returns. What would be great is benefiting from a correction when it happens. Or what if you think the market as a whole will keep going up, but think that Telstra shares are overpriced and are due to fall and want to benefit from this fall?

Well the answer is you can. You do this by "going short". There are numerous ways to go short, or sell a stock (or index) that you think will fall. You can purchase Call Options or Warrants, or sell Contracts for Difference (CFD's) or even short sell on the ASX. However, these strategies are risky, and not for the novice investor.

There are other ways to benefit from this strategy though. This involves investing in fund managers who can "go short". These are usually referred to as "Long / Short Funds". In a previous post I have written about how the after tax returns of actively managed funds often do not justify the extra risk and fees involved. However, a fund with the option to take on strategies like this can definitely provide value IF they get it right!

These types of funds are relatively new to the market. I have tried to find some returns on some tried and tested long/short funds, however they all seem to have existed for less than 12 months. Time will tell if these fund managers can predict when to go long and when to go short.

Some funds offering a long/short option are:

Acadian Australian Equity Long / Short
PM Capital Australian Share Fund
JANA Australian Share Long Short Trust
Macquarie Alpha Opportunities Fund
Perpetual Share Plus Fund

Time will tell what the success of these funds is.