Long / short equity

Long / short equity is becoming increasingly popular as a hedge fund strategy. To go long in an equity, the manager buys, anticipating a price rise. To go short, he identifies a sector and a stock he reckons is due a fall (for example, UK retail). He borrows shares from a major holder like a pension fund, and then sells them in the market. The money he gets for them is put on deposit and earns interest for the fund.

If all goes well, the stock falls and he buys it back at a lower price (if the stock ends up rising, he can lose a lot of money trying to buy it back). The original stock is then returned to the lender plus a borrowing fee.

• See Tim Bennett’s video tutorial: Why a short-selling ban won’t work.