Convergence Long/Short Equity ETF (CLSE)

The Convergence Long/Short Equity ETF (ticker: CLSE) is a liquid, daily-traded fund that follows a hedge-fund-inspired strategy: holding equity positions it favours (the “long” book) while shorting equities it believes overvalued (the “short” book), and deploying into preferred stocks, seeking returns that do not simply move with the stock market.

A long/short equity fund is not betting on up or down — it is betting on relative value, that the things it likes will outperform the things it dislikes.

The structure and the bet

Most investors buy a stock fund and hope the market goes up. A long/short equity fund makes a more elaborate bet. It identifies companies and sectors it wants to own — the “long” positions — and separately identifies stocks it believes are overvalued and likely to underperform — the “short” positions. It buys the longs and borrows and sells the shorts, banking on the spread between the two books of bets.

The critical insight is that this is a relative bet, not an absolute one. If the entire stock market crashes, a well-constructed long/short portfolio might decline less steeply than the market, because the shorts are also falling (and the fund is short them, so it profits when the borrowed shares decline in value). Conversely, in a roaring bull market, a cautious long/short fund might underperform the market, because the shorts act as a hedge that dampens gains.

CLSE adds a second layer: it allocates to preferred stock in addition to common equity long and short positions. Preferred shares occupy a middle ground between bonds and common stock — they pay a higher, fixed coupon than bonds but rank below bonds in a bankruptcy, and above common shareholders. Preferred stock typically carries lower volatility than common, which can stabilise the fund’s overall portfolio.

Volatility and diversification

The appeal of a long/short fund is that it can deliver positive returns in years when the stock market falls. Because the shorts are a drag on upside in bull markets but a cushion in downturns, the fund’s returns tend to have lower volatility and a different drawdown profile than simply owning the broad market. An investor seeking to reduce the jolt of market declines might accept lower average long-term returns in exchange for that smoother ride.

The cost of that stabilisation is often underperformance in sustained bull markets. During the 2010s and early 2020s, when the stock market delivered strong returns, many long/short funds trailed the S&P 500 significantly. The shorts, which were hedges in the portfolio, instead became drags on absolute returns because the overvalued stocks that the fund was shorting simply kept rising.

The mechanics of shorting within an ETF

For a retail investor, shorting stock is cumbersome: you must borrow shares, pay borrowing costs, maintain a margin account, and monitor daily marks. CLSE packages that complexity inside an ETF wrapper. The fund borrows stocks on behalf of shareholders; the borrowing costs and mark-to-market mechanics are invisible to the share owner. You simply buy CLSE shares, and the portfolio’s shorts are built in.

That transparency is valuable, but it does not eliminate the economic reality: short positions have a cost (the cost of borrowing the shares) and a risk (if a shorted stock rallies sharply, the position’s loss is theoretically unlimited, which is why shorts must be sized carefully and monitored). If CLSE’s short book guesses wrong — if the stocks it shorts outperform expectations — the fund underperforms.

Manager discretion and risk

Unlike a passive index fund, CLSE requires active decisions. The portfolio manager must decide which stocks to own, which to short, how large each position should be, and how to rebalance as valuations shift. That discretion introduces manager risk: a skilled manager can outperform by picking better longs and more vulnerable shorts, but a poor one will lag, potentially by a lot.

The manager also faces a subtle structural challenge: the short book is harder to scale than the long book. If a stock rallies sharply and becomes harder to borrow, or if short interest spikes and borrowing costs soar, the fund’s economics deteriorate. In volatile or fast-moving markets, the short positions can become expensive or even impossible to maintain at their intended sizes.

Who this fund is for

CLSE is best suited to investors who are concerned about downside risk in equities, who want to hold equities for their return potential, but who are willing to sacrifice some upside for reduced volatility. It is also used by advisors as a satellite holding in a diversified portfolio — not the core equity holding, but a complementary piece that dampens overall portfolio swings.

It is not a substitute for a bond fund — it can still decline significantly in market stress — and it is not a hedge against a near-term crash (the shorts help, but they are not a guarantee). It is a long-term alternative for equity exposure that trades some alpha for smoother returns.

Research and transparency

Start with the fund’s prospectus and factsheet, which describe the target long/short positioning, the preferred-stock allocation, and the manager’s investment process. Review the fund’s long and short holdings (published quarterly or semi-annually) to understand the specific bets. Compare the fund’s performance and volatility to a mix of the S&P 500 and long-term Treasury bonds — that gives you a sense of how well it is actually delivering on its promise to reduce downside.

Watch for periods of underperformance and understand what went wrong: did the shorts spike unexpectedly? Did the long positions fall harder than expected? The fund’s annual letter and quarterly commentary should explain. As always, this is not investment advice, and CLSE shares trade at market prices that fluctuate daily.