Equity long-short strategies

By combining a fundamental multifactor model with value-at-risk and stress testing, hedge fund managers can better understand the risks of their strategies as well as the potential impact of extreme events, say Mike Mulvihill and Neil Gilfedder of Barra, and Chris Brady of Financial Engineering Associates

Hedge fund managers often assure clients they can gain absolute returns with very low risks through a market-neutral long/short strategy. Profits are gained from higher residual returns on the long side than on the short side. Although enticing, many investors are concerned that this strategy is exposed to high unanticipated risks and that hedge fund managers lack the tools to effectively manage this risk. Fortunately, an answer to this common investor concern is available. By combining a