long short strategy
Long Short Strategy means buying shares you believe will rise while selling borrowed shares you believe will fall, so you can win either way.
In plain English
Every family has that relative who backs two horses in a race, one because he loves it and one because he is not sure the first one can actually run. That instinct, betting on a winner while calmly hedging against the possibility you are wrong, is basically what a long short strategy does with shares.
In the stock market, going long simply means buying a share because you expect its price to climb. Going short means borrowing a share you do not own, selling it immediately, and hoping to buy it back later at a lower price so you can return it and pocket the difference. A long short strategy combines both at the same time, in the same portfolio.
Say a fund manager in Lagos believes Dangote Cement will keep growing because of infrastructure demand, so she buys the shares. At the same time, she thinks a smaller, struggling cement company is overvalued and about to fall, so she borrows and sells its shares short. If the whole market crashes because of bad news out of nowhere, her long position may drop, but her short position gains, softening the blow. She is more than betting the market rises, she is betting that her cement pick beats the weaker one, whatever happens generally.
This is the same thinking behind many hedge funds in London and New York. They are not trying to predict whether the entire NASDAQ goes up or down. They are trying to be right about which companies are stronger than others, and they use the short side to protect themselves from being wrong about the overall direction.
For a Nigerian in the diaspora managing investments back home, the lesson is smaller but still useful. You do not need to borrow shares to short anything, but you can learn from the mindset. Do not put every naira into one bet on one direction. Have a view on what will do well, and a plan for what happens if the wider market disagrees with you.
An investor puts ₦2,000,000 into shares of a bank he expects to grow, and separately short sells ₦1,000,000 worth of a weaker bank he expects to struggle. If the whole banking sector drops ten percent, his long position loses value, but his short position gains as the weaker bank falls harder, cushioning his overall loss.
Questions people ask
Can an ordinary retail investor in Nigeria actually short a stock?
Short selling in the way described here needs a broker who allows borrowing shares, which is common in markets like the United States and United Kingdom but still limited on the Nigerian Exchange. Most Nigerian retail investors cannot easily short local shares yet, though some access global markets through platforms that allow it.
Is a long short strategy the same as just diversifying?
Not quite. Diversifying means spreading money across many different investments to reduce risk. A long short strategy is more deliberate, it takes an active view on which specific shares will outperform and which will underperform, using the short side almost like insurance against being wrong about the market's general direction.
What is the biggest risk of going short on a share?
Losses on a short position have no natural ceiling, because a share price can theoretically keep rising forever, unlike a long position where the most you can lose is what you invested. This makes shorting far riskier and is a big reason it is usually left to experienced fund managers rather than beginners.
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