Strategy
Taking position benefitting from both rising and falling markeds are the essence of a long/short equity fund
Hedging
All trades taken by Venninvest AS is based on quantitative strategies and modelling of historical volatility. To mitigate a high-risk profile and avoid losses of natural cyclical fluctuations or severe market turmoil - as during the Great Depression of the 1930s or the Great Recession of recent times - a balance position are always counterweighted or hedged.
Typically, and within a specific time frame, the management will hold a portfolio of short equity futures along with a portfolio of long call options. The ability to hedge the investment requires that leverage is used. This increases return potential, but also creates greater risk of loss. A set of general trading rules ensures that this is not compromising the comapanys liquidity.
Volatility targeting and net long bias
Volatility targeting is an important part of the strategy. Put simply, the successful outcome of holding long/short positions in similar asset classes depends on the degree of market volatility. A prolonged period of low volatility gives few benefits. On the other hand, if a storm is brewing or euphoria takes hold, the strategy is targeting the resulting spike in volatility as a profit opportunity.
The time frame for trades are in general short, but successive (monthly investment redemption cycle). And overall, the concept maintains a net long bias in order to benefit from the equity market's historical trend to move higher. Any investors/shareholders in the company must comprehend the funds illiquid character and the long run horizon; they cannot sell their portfolio or withdraw money for a specific period. So investors may be locked in for years.
"What next?"
...the front page of The Economist Sept 20 2008 issue asked. The answer was to become the Great Recession, the most severe downturn since the 1930s.
Between August 2008 and March 2009 the DJIA fell by almost half. Financial houses as Lehman Brothers and AIG went bankrupt or were rescued by the State. Production, prices and employment fell worldwide. However, the next years saw a surge in equity prices, particularly in the US, where the Dow tripled. A long/short equity fund must have a strategy and risk control measures that can cope with such challenging market fluctuations. If not, it will be dead in the long run.