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Hedging Hurt Long-Short Equity Funds in 2016

While the average long-short fund returned about 2% last year, specific fund returns ranged from a 25% gain at the top to a 17% loss at the bottom.

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Josh Charlson: 2016 was a tough year for many funds in Morningstar's long-short equity category. It's not surprising that funds that engage in hedging, or shorting, as long-short equity funds do, would lag long-only funds in a year when many equity markets boomed. But the average long-short equity fund gained only 2.3%--far less than one might expect, considering that the S&P 500 returned around 12% and the typical long-short equity fund averages around 50% exposure to the stock market.

However, the averages mask a wide range of returns in the category. Long-short equity returns ranged from 25% at the top end to negative 17.6% at the bottom--a huge spread. Part of the disparity results from the fact that betas, or market exposures, can range widely in the category, and on top of that many managers have the flexibility to move that exposure around actively during the year. 

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