Long-only Equity Strategy

The simplest of the equity-market strategies: the manager buys shares it believes in, and does not sell short when it builds the portfolio.

The workbook describes the Long-only Equity Strategy as focused on delivering absolute returns over the medium to long term, with a strong emphasis on capital preservation. The manager takes a long, or "buy", position in the selected stocks and generally does not take a short, or "sell", position at the time of investment.

"Long-only" describes how stocks are bought, not a ban on protection. A prudent manager may still hedge against a fall in the market, using derivatives. What the strategy cannot do is profit from picking over-priced stocks to short — that freedom belongs to the long-short strategy.

Stock selection. Managers use a top-down or bottom-up fundamental approach, aiming for companies with predictable, scalable and quality business models. They analyse historical data of target companies such as dividend pay-outs, return on capital employed and other financial parameters.

Hedging. To protect against a fall in value, the manager can take an opposite, sell-side position in a derivative of the stock or index — a short futures position or a bought put option, on an underlying with characteristics similar to the portfolio. The workbook says options can prove more efficient than futures for hedging, and that the most suitable hedge can be to buy a put on the NIFTY50 or S&P BSE SENSEX and keep rolling the contracts forward. The hedge should be changed regularly to keep matching the portfolio.

Risk. Despite hedging, a Long-only Strategy may be volatile and risky during economic downturns.

How it compares:

The workbook's Fund FGH (Example 1), as on 1 April 2023:

Suggested hedge: buy 150 lots of NIFTY50 9000 puts, lot size 450, premium Rs 500, expiring 31 December 2023 — nine months out:

Premium = 150 × 450 × Rs 500 = Rs 3,37,50,000

Illustrative outcome. Suppose the NIFTY closes at 8,000 on expiry and the portfolio has lost 12%:

Portfolio loss   = 12% × Rs 50 crore               = Rs 6,00,00,000
Put pay-off      = (9,000 − 8,000) × 150 × 450     = Rs 6,75,00,000
Less premium                                       = Rs 3,37,50,000
Net hedge gain                                     = Rs 3,37,50,000
Net loss after hedge                               = Rs 2,62,50,000

The hedge roughly halves the damage. Had the market risen instead, the premium would simply be the cost of protection.

Risk-adjusted view (Example 12). Manager PQC's long-only fund: return 15.75%, standard deviation 2.15%, beta 1.82, T-bill 5.60%:

Sharpe  = (15.75 − 5.60) ÷ 2.15 = 4.72
Treynor = (15.75 − 5.60) ÷ 1.82 = 5.58

Chapter 7, section 7.1.1 defines the strategy with the Fund FGH example, and Chapter 7's first sample question asks in which strategy the manager takes only buy positions at the time of investment — the answer is Long-only. Chapter 6 uses a long-only fund in its Sharpe and Treynor example (Example 12) and in its benchmarking example (Example 14), where Fund X, an equity long-only large-cap fund, is benchmarked against indices such as NIFTY 50 or S&P BSE SENSEX. Chapter 3's comparison tables list "long only, long short" among Category III strategies.

• Long-only permits hedging. Short futures or bought puts to protect the portfolio are consistent with the strategy; shorting stocks as an investment view is not.
• "At the time of investment" is the workbook's qualifier — the defining feature is buying only when building positions.
• The stated goal is absolute return with capital preservation, over the medium to long term.
• Options, not futures, are described as the more efficient hedge, with rolling index puts as the suggested approach.
• Hedged does not mean safe. The workbook still calls the strategy volatile and risky in downturns.
• Long-only is net long; short-bias is net short. Dedicated-long is the directional cousin that takes exclusively long positions.