Chartered Financial Analyst Level 2

Explanation

Long/short equity hedge fund strategies typically maintain a net long exposure of 40%–60%. This means that after offsetting long and short positions, the overall market exposure remains moderately positive.

Why Option A is Correct:

• Long/short equity funds typically maintain a net long bias, meaning their long positions exceed their short positions
• The 40%–60% net long exposure range is characteristic of these strategies
• This moderate net exposure allows them to capture market upside while hedging downside risk

Why Option B is Incorrect:

• If gross short exposure were more than double gross long exposure, the fund would have a net short position
• Long/short equity funds typically have net long exposure, not net short

Why Option C is Incorrect:

• While hedge funds can have different risk profiles, the standard deviation is not typically more than double that of long-only funds
• Long/short strategies often aim to reduce volatility compared to long-only strategies through hedging
• The risk reduction from short positions typically lowers, not increases, standard deviation

Long/short equity strategies aim to generate returns from both long positions in undervalued securities and short positions in overvalued securities, while maintaining a net long exposure to capture overall market appreciation.