The long-bias hedge fund strategy essentially serves as an investment halfway house in between a market-neutral fund and a long-only fund. Rather than putting on positions that cancel out as found in a market neutral fund, or having substantial long exposure as in a long-only fund, a long-bias fund maintains a differing ratio of long positions (compared to short positions) that usually exceeds 40%. With this definition in mind, a hedge fund with a long/short equity strategy could transition into a long-bias hedge fund, and vice versa, depending on how its assets were allocated. It should also be noted that long-bias hedge funds emerged during the 1990s during the bull market that concomitantly saw a marked decrease in the number of short-only hedge funds. The long-bias investment model became a key investment strategy to benefit from a rising market while still affording flexibility to short certain stocks or segments in the market.
The long-bias strategy has a number of advantages. Historically, equity markets have gradually moved higher indicating that long exposure to the market would lead to higher returns, even if counterintuitive bets didn't pay off. For example, many hedge funds maintain net long exposures that range from between -20% to +80% - the long bias averages out to roughly net exposures of 40% or greater over time. Another related advantage is that long-bias funds, due to their net long position, maintain lower levels of gross leverage. Leverage levels are typically lower than funds with more substantial short positions because long-bias hedge funds can acquire substantial positions over time.
Finally, long-bias funds do not have as many timing issues as either market neutral or a long/short fund (depending on asset allocation): By maintaining a long-bias, these funds are able to take advantage of increases in the market that may be missed if assets were continually reallocated into different positions over time.
A major disadvantage of the long-bias strategy is a secular decline in the market that can lead to mounting losses. The precipitous market decline in 2007-2008 dented a number of long-bias funds. Although the funds could strategically lower the percentage of assets assigned to long positions, the high correlation to the market still negatively impacted results. Another disadvantage is that hedge fund managers can be lulled into keeping successful long positions without a rotation into different, more profitable opportunities. It is thus very important for managers to set goals regarding when to exit investments.
Although long-bias funds have taken a beating in the recent market turmoil, many investors still reckon that equity markets will rise over time. As short positions also are in high demand, the flexibility involved with the long-bias model will likely make it a long-term presence on the investing landscape.
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