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Putting the cart before the prancing horse

A long-only fund run by traditional asset manager bears little resemblance to the long-only fund run by a hedge fund.

Do long-only hedge funds exist? No, assert some in the industry as an increasing number of hedge fund managers nevertheless launch long-only funds. "A hedge fund cannot be long-only and that is that," says one manager. "It's like Ferrari saying they're a horse-and-cart business."

It's easy to see why some hedge fund managers have taken offence. They've spent the past 10 or so years looking for cutting-edge trading strategies and now along come a handful of managers offering an unoriginal approach and winning their business.

Yet if one considers general definitions of a hedge fund (of which there are many) the answer is that a long-only strategy is indeed possible. Hedge funds differentiate themselves from mutual funds by being investment companies that use techniques such as borrowing money or selling short in order to maximize absolute returns rather than relative returns. In the case of long-only funds run by hedge fund managers, these criteria still apply. Managers are borrowing money to buy stocks with the aim of providing absolute returns.

The confusion is among investors. They hear long-only and feel comfortable. It's an area they are familiar with, and here are hedge fund managers, known for their ability to produce returns in a difficult market, now offering long-only products.

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