A long/short strategy (as the name implies) involves buying shares of some companies (going long) as well as short-selling other stocks (shorting). It’s a riskier game, but one that can pay off handsomely if you do it correctly. There are many managed funds that offer this strategy, but Listed Investment Companies (LICs) have been more reluctant to follow.
What is Short-Selling?
If you’ve bought shares of anything before, you’ve already ‘been long’, but most retail investors have never shorted a stock. Short selling involves ‘borrowing’ shares and selling them under a contract, where you agree to re-purchase the shares back at a later time. If the share price at this time is below the price you sold them at, you make a profit (sell high, buy low). This is a high-risk strategy but can pay off if done correctly. Short portfolios often outperform during bear markets so long/short funds are often cited as a way of hedging against a share market crash.
Are there ASX Long/Short LICs?
Indeed there are. LICs are a popular investment vehicle on the ASX as many investors enjoy a ‘hands-off’ approach – it takes the pressure of stock picking out of investing after all. Of course, you pay a management fee for this privilege, but if your chosen LIC can consistently beat the index, then it may be well worth it.
Enter L1 Long Short Fund Ltd (ASX: LSF).
LSF has had a difficult time since floating in April 2018. LSF shares IPO’ed for a price of $2 a share and raised $1.3 billion in the process, but poor performance saw the share price fall to $1.27 in December, where it has only partially recovered to the $1.45 level it sits at today. Still, teething problems can be common, especially as this LIC vastly exceeded its initially expected capital raise and L1 had a very successful track record with its unlisted long/short fund prior to LSF launching. LSF has a current (as of June 30) Net Tangible Asset (NTA) per share of $1.67 and has delivered a 14.3% return YTD so far.
Although long/short funds and LICs can be useful, I think they are a bit beyond what an ordinary investor should be dabbling with. LSF has proved that for me, and there are no standout long/short LICs that I have come across personally that would be worth a long-term investment. This may change if we enter into a bear market, but for now, at least, I’m sticking to the (long) sidelines.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019