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Rocketing Stocks Short-Sheet Long-Short Equity Funds

An epic rally in the underdogs of Wall Street illustrates the challenges of short-selling.

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Long-short equity funds offer an appealing pitch. If you think a manager can pick good businesses to invest in, why wouldn’t they be able to pick bad ones to bet against?

So far 2021 has demonstrated that reality is more complex. Many stocks that a lot of managers have been shorting, or betting they would crater, have blasted off instead, exposing short-sellers, including many active long-short strategies, to mounting losses. It’s been a hard-knocks refresher course on the perils of short-selling and long-short approaches in general. Such strategies should be able to keep up in strong equity environments and theoretically can act a hedge for investors worried about frothy markets.

Bobby Blue does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.