Let's explore how investors actually use equities.
The different strategies they apply depending on their objectives, risk, appetites, and investment. Horizon equities are one of the most liquid and established asset classes in global markets.
They attract a wide range of participants from pension funds and insurance companies to hedge funds and active traders, each using different approaches to express their views or manage exposure.
Broadly speaking, most equity strategies fall into one of four categories, long, only short, long shorts and special situations, or relative value trades.
Importantly, these strategies can be implemented either directly through shares or synthetically through derivatives, such as equity futures, swaps, and options.
These instruments give investors flexibility in shaping their exposure, managing risk, and using leverage efficiently.
In a long only strategy, investors buy shares and hold them with the expectation that prices will rise over time.
This is the foundation of traditional equity investing used by pension funds, mutual funds, and index trackers alike.
The reasoning behind a long position can vary fundamental based on the company's underlying earnings growth, sector expansion, or company strength.
Valuation based when investing is based on a stock looks cheap relative to its peers or historical averages or technical, such as buying ahead of an index inclusion or after a bullish price breakouts.
In all cases, the goal is to benefit from capital appreciation and in some cases, some dividend income.
The opposite of a long position is an outright short position.
Here, an investor borrows shares typically through the securities lending market, then sells them in the open markets with the aim of buying them back later at a lower price.
Short selling allows investors to profit from falling prices or to hedge long exposure elsewhere in their portfolios.
It plays a vital role in maintaining market liquidity and price efficiency, but it also carries greater risk.
Unlike a long position where the maximum loss is limited to the amount invested losses on a short position are theoretically unlimited if the stock price rises sharply.
That's why short positions require careful monitoring margin management, and often leverage constraints between those two extremes lies the long short strategy, which combines both positions.
An investor takes a long position in one security and a short position in another, profiting from their relative performance rather than from overall market direction.
For example, a trader might go long, a strong company within a sector and short a weaker competitor, or go long a specific stock while shorting the sector index.
This structure reduces exposure to broad market moves, often referred to as beta and focuses instead on stock specific returns or alpha.
The total profit or loss from a long short trade is simply the sum of the two legs, one from the long position, and one from the shorts.
This is the foundation of many hedge fund strategies designed to generate consistent returns even in volatile or sideways markets.
The final group of strategies targets specific corporate events or pricing inefficiencies.
Situations where prices of related securities temporarily diverge from fair value.
Some relative value traders use pairs trading or index arbitrage, taking advantage of small short-term discrepancies between correlated pairs of stocks or between a stock index and its future contract.
Others focus on more event-driven opportunities, such as risk arbitrage, also known as merger arbitrage.
In these trades, an investor goes long, the target companies shares and short the acquirer's shares betting that the price gap between the two will close.
Once the deal completes, then there's convertible bonds arbitrage where investors buy a company's convertible bonds and hedge out its individual risks using a credit default swap to offset credit exposure and interest rate swap to neutralize rate risk and equity options, or dynamic delta hedging To manage the equity components, the goal is to isolate the relative value opportunity between the bonds market price and its theoretical fair value.
Finally, rights issue arbitrage exploits temporary mispricing during a rights offering.
If the rights to buy new shares and the existing stock become misaligned, traders can lock in small low risk gains by buying one and Shorting the other, for example, selling the stock above the combined cost of the right and the subscription price.
These trades depend heavily on liquidity, execution speed, and precise hedging areas where professional investors specialize.
In practice, most institutional portfolios combine several of these approaches using long only holdings as a foundation and overlaying long, short or arbitrage positions to fine tune performance, to manage risk, and take advantage of specific market opportunities.
