Long short equity strategies are one of the core approaches used by hedge funds and active investors to generate returns independent of overall market direction.

In essence, a long short strategy combines two opposing positions a long in one stock that is expected to outperform and a short in another that is expected to underperform.

Rather than simply betting on markets rising or falling, the goal is to profit from the relative performance between the two positions.

Imagine you believe stock A is undervalued compared to stock B.

You might go long stock A and short stock B expecting the price gap to close over time, whether that happens through stock A, rising stock, B falling, or a bit of both.

This kind of relative value trade aims to isolate stock specific alpha while minimizing exposure to the broader market or beta.

However, in practice, two stocks rarely move in perfect lockstep with the market.

Each has its own beta or sensitivity to market movements.

If stock A has a beta of 1.2 and stock B has a beta of 0.8, your positions aren't naturally market neutral.

Without adjustments, you'd effectively be long the market, because your long position carries more market exposure than your short.

That's why professional traders beta adjust their position sizes.

They scale each leg so that the overall exposure to the market is balanced.

That way any gain or loss is primarily driven by the relative movement between the two stocks, not by whether the market as a whole goes up or down.

So what actually drives these returns? Each leg of the trade responds to different catalysts.

For your long position, the one you expect to rise, you are looking for earnings upgrades, new product launches or corporate developments, higher than expected dividends or any positive news that attracts equity investors for your short position, the one you expect to fall, you are watching for sector downgrades, profit warnings, earnings, disappointments, or rising financing and input costs that could pressure margins.

If your thesis is right, the long position will outperform.

The short and the spread between the two prices will narrow In your favor.

Of course, if the opposite happens, the stock, your long underperforms, while you are short rallies, the trade loses money.

So even though long short strategies reduce market risk, they don't eliminate risk altogether.

You are still exposed to idiosyncratic risk.

The specific factors affecting each company.