Long-short strategy: How funds invest in both directions

Updated: July 23, 2026

When a fund buys a stock, the logic is straightforward: if the price rises, the position gains value. A long-short strategy adds a second dimension. The fund can also bet on the falling prices of individual stocks, allowing it to make broader use of its research.

While this may sound technical, it is a long-standing institutional investment approach. The key is the underlying mechanism: a fund manager evaluates companies, forms an opinion on strong and weak stocks, and implements this view on both sides of the portfolio.

For you, one question is particularly relevant: how does this change a fund's profile? That is exactly what this article covers, from long and short positions and market-neutral strategies to Active Extension as a regulated fund format.

What does long-short actually mean?

Long means the fund buys a stock because the management expects the price to rise. If the company performs well and the share price increases, the long position profits.

Short works differently. The fund borrows a stock, sells it on the market, and ideally buys it back later at a lower price. The difference can be a profit, provided the price actually falls. If the price rises, however, a loss is incurred.

A long-short strategy combines both directions in one fund. The long side consists of stocks that the fund management considers promising. The short side consists of stocks that it views as weak, overvalued, or having poor prospects.

The important point: the short side is not gambling, provided it is used systematically. It is a tool that allows a fund manager to express their assessments of companies more fully. Those who conduct intensive stock analysis usually find not only companies with attractive opportunities but also stocks with structural problems. Long-short makes both investable.

How does a long-short strategy work in practice?

A classic equity fund usually invests in stocks that the fund management is convinced by. A long-short strategy expands this logic: the fund can additionally use positions that profit from the falling prices of individual stocks.

A simplified example is a 130/30 fund. It holds about 130 percent in long positions in stocks the management finds attractive, and about 30 percent in short positions in stocks it views critically. The net market exposure is then around 100 percent.

This may sound contradictory at first: how can a fund invest 130 percent and still end up with roughly 100 percent dependency on the stock market? The answer lies in the offsetting. The long side increases equity exposure, while the short side reduces it. On balance, the fund remains roughly as exposed to the stock market as a classic equity fund.

This is precisely where the distinction between gross and net helps. Gross shows how much is working in the portfolio in total, i.e., the long and short sides combined. Net shows how much the fund is still exposed to the stock market after offsetting the short positions. This net view helps you better assess the market dependency of a long-short fund.

The extent to which a long-short fund depends on general market trends varies by strategy. This is illustrated by the comparison between Active Extension and a market-neutral approach.

What is Active Extension?

Active Extension is a form of long-short strategy. The fund remains invested in the stock market at all times, supplementing a traditional equity fund with short positions. This allows the management team to actively take short positions on companies they view critically.

Active extension strategies often use a 130/30 approach: approximately 130 percent long positions and 30 percent short positions. After netting these out, the net market exposure is around 100 percent. As a result, the fund remains roughly as dependent on the stock market as a traditional equity fund.

The additional flexibility lies in the selection of individual stocks. Management can overweight companies they are confident in and reflect critical assessments through short positions in the portfolio. If the analysis is correct, this can boost performance. However, misjudgments can place additional strain on the fund.

What is the difference compared to a market-neutral strategy?

In a market-neutral strategy, the fund attempts to balance the long and short sides as closely as possible. The net market exposure is then close to zero. The general direction of the stock market is intended to play a minor role. The decisive factor is whether the selected long positions perform better than the selected short positions.

While this can work, it makes the fund highly dependent on the quality of individual stock selection. If the long side disappoints or the short side moves against the fund, a calm overall market provides little help.

With long-bias strategies such as Active Extension, the net exposure typically remains close to that of a traditional equity fund. The fund therefore continues to participate in general market trends. In addition, management attempts to create added value through the selection of individual long and short positions.

Which variant is more suitable depends on the fund's objective, risk profile, and the market environment. For you, the key takeaway is: A market-neutral strategy aims more strongly at reducing dependence on the overall market. Active Extension remains closer to the stock market while adding a second dimension to the portfolio.

What is the difference compared to hedge funds?

Long-short is a strategy. Hedge funds are a product category in which such strategies are frequently employed. Many hedge funds operate with high flexibility, less regulation, and minimum investment requirements intended primarily for professional investors.

Long-short funds can also be implemented as regulated investment funds. For you, this means that while the strategy uses long and short positions, it follows strict rules regarding risk diversification, liquidity, and transparency. This distinguishes it significantly from many hedge funds, which are often structured to be more flexible and less accessible.

Active Extension falls exactly into this category: institutional mechanics implemented within a regulated fund format. If you would like to understand more about how hedge funds are classified legally and what options are available to private investors, you can find more information in the article Hedge funds for private investors.

The term "hedge fund alternative" is therefore only accurate with some precision. Active Extension uses a tool familiar to many in the hedge fund world, but operates within a regulated fund framework.

Opportunities and risks at a glance

Long-short strategies can provide fund management with more ways to express their views. Equity analysis provides the management team with assessments of both promising and critically viewed companies. Both perspectives can be incorporated into the portfolio via the long and short sides, making the analysis more broadly applicable.

Furthermore, it offers more flexibility compared to a pure long-only fund. If a company appears fundamentally weak, this assessment can be reflected in the portfolio rather than simply leading to an underweight position.

At the same time, the short side increases complexity. A short position can move against the fund if the stock price rises. Losses on the short side can be significant because a stock price can theoretically rise indefinitely. Active management can also be wrong: if long positions disappoint and short positions rise, the misjudgment impacts the fund on both sides.

There are other factors to consider. Long-short funds can have higher costs than passive funds, and their performance depends heavily on management, the risk model, and execution. Capital losses, including a total loss of investment, are possible.

What this means for you: A long-short strategy gives fund management additional ways to implement their market views within the portfolio. At the same time, complexity and risks increase.

A concrete example: Active Extension at J.P. Morgan on NAO

You can find a concrete example of Active Extension from J.P. Morgan Asset Management on NAO: the JPMorgan Funds - Global Equity Plus Fund (ISIN LU3351089811, launched in May 2026) and the JPMorgan Funds - Emerging Markets Equity Plus Fund (ISIN LU2190025218, launched in December 2020).

Both funds use the well-known 130/30 approach: approximately 130 percent long positions, approximately 30 percent short positions, and around 100 percent net market exposure. Simply put: the funds remain close to the basic profile of an equity fund, but additionally use the short side to express critical views on individual companies.

The experience behind the strategy is key. J.P. Morgan Asset Management has been using Active Extension for institutional clients for around 20 years. The asset manager oversees $4.6 trillion USD (as of 06/30/2026), invests over $190 million USD annually in equity research, and works with more than 400 equity experts across 9 locations worldwide.

You can view both funds in the NAO app. Hand-picked by our investment team, just like every fund in the NAO app.

If you are particularly interested in the emerging markets aspect, you can find more information in the article Emerging Markets Funds.

FAQ

What is a long-short strategy?

A long-short strategy simultaneously invests in securities expected to rise in value and those expected to fall. Long positions profit from rising prices, while short positions profit from falling prices. The goal is to leverage research on both sides of the market.

What is the difference between long-short and market-neutral?

Long-short simply describes the fact that a fund uses both long and short positions. Market-neutral is a specific form of this: the fund attempts to balance both sides so that the general direction of the stock market plays a smaller role. With Active Extension, however, the net market exposure typically remains at around 100 percent. The fund therefore remains as exposed to the stock market as a classic equity fund.

Are long-short funds accessible to retail investors?

Yes, long-short strategies can also be implemented in regulated investment funds. What matters most for you is the fund structure in which the strategy operates, the risks described, and the information provided in the fund documentation. Classic hedge funds with similar strategies are often aimed at professional investors and frequently follow different rules.

What is the difference between a long-short fund and a hedge fund?

A long-short fund describes a fund that combines long and short positions. A hedge fund is a broader product category with often more flexible strategies and different access requirements. Long-short strategies can be found in hedge funds, but also in regulated fund formats such as UCITS.

How can I invest in a long-short strategy?

One option is regulated funds with an active extension strategy. The JPMorgan Funds - Global Equity Plus Fund and the JPMorgan Funds - Emerging Markets Equity Plus Fund are available on the NAO app with no minimum investment. The decision depends on your investment goals, risk profile, and the fund documentation.

Not investment advice. Fund documentation and KID available in the NAO app.