Long/short equity hedge funds hold both long and short positions in public companies. Most often this is done by buying or selling short the common equity of public companies. Long/short hedge funds may also use futures, forwards, equity swaps and options. They may also employ various factor and macro hedges, which may involve foreign exchange, commodity or fixed income instruments. While foreign exchange hedges are very common, the use of commodity and fixed income instruments is less common.
Most long/short hedge funds are long biased. These funds have more exposure to long positions than short positions, and are positively correlated with broad equity market indexes. Some long/short funds are market neutral. These funds try to minimize their market exposure.
By reducing net market exposure, a long/short fund’s short positions act to reduce its risk. Most long/short hedge funds employ some leverage, which acts to increase their risk. Because of this, a long/short hedge fund might be more or less volatile than a similar long-only fund.
Long/short hedge funds may focus on a particular geography (United States, Europe, emerging markets, …), on a particular industry, or on a particular company size (large cap, or small cap). Merger arbitrage hedge funds can be viewed as a type of long/short hedge fund.