Even Herd Long Short ETF (EHLS)

EHLS is an exchange-traded fund that employs a long-short equity strategy. The fund manager selects stocks to own and stocks to sell short simultaneously. The long side seeks to capture returns from companies expected to outperform; the short side seeks to profit from companies expected to underperform, while also hedging the fund’s exposure to broad market moves. The result is a fund designed to generate returns with lower correlation to the broader stock market and lower volatility than a traditional long-only equity fund.

Origins of the strategy

The long-short equity approach emerged in the 1980s and 1990s from hedge funds seeking to generate returns independent of market direction. A traditional stock fund makes money when markets rise and loses when they fall. A manager pursuing a long-short approach wanted to escape that dependency. By taking equal or balanced short positions against longs, the manager could theoretically profit from stock-picking skill without needing the overall market to cooperate.

The strategy proved attractive during the 2000s and 2010s as interest in hedge funds and alternative investments grew. Institutional investors sought to reduce their portfolios’ sensitivity to market swings and capture uncorrelated returns. Long-short funds proliferated in traditional hedge fund structures accessible to institutions and high-net-worth investors. As the ETF market expanded, long-short equity ETFs emerged to bring the strategy to retail investors with smaller account sizes.

How the strategy works

The fund manager maintains two portfolios simultaneously. The long portfolio holds stocks the manager believes will outperform. The short portfolio holds stocks the manager believes will underperform. The manager buys longs and sells shorts such that the total dollar amount long roughly equals the total dollar amount short, creating a net-neutral or close-to-neutral stance.

If stocks rise and the long portfolio gains while the short portfolio loses, the long gains exceed the short losses, and the fund profits. If stocks fall and both sides lose, the short losses might be offset by the long losses, reducing the overall fund loss. The long-short structure provides downside protection because gains and losses interact.

The strategy is not market-neutral in the strict sense. The longs and shorts are not perfectly hedged, and the fund typically carries a slight long bias. But the short positions do reduce the fund’s overall market sensitivity and volatility relative to a pure long-only fund.

Implementation and leverage

EHLS achieves its short positions through short selling: borrowing shares from a broker, selling them, and holding the sale proceeds. The manager must pay a borrow fee to the lender and maintain sufficient collateral. If the borrowed stock’s price rises, the short position loses money until it is closed.

The fund may use leverage to amplify both long and short positions, increasing exposure beyond shareholder capital. Leverage amplifies both gains and losses and introduces additional costs and risks. The fund’s prospectus discloses whether leverage is used and any leverage limits.

Daily rebalancing is typical. The manager may adjust positions to maintain the target long-short balance and respond to new research or market conditions. That trading creates costs and can generate capital gains.

Costs and performance dynamics

Long-short funds carry higher expenses than passive index funds because of active management, short-borrow fees, and the costs of maintaining and rebalancing two portfolios. The expense ratio includes the base management fee, supplemented by borrow costs and trading commissions, which reduce returns.

Performance depends entirely on the manager’s stock-picking skill. In a rising market where most stocks advance, the short positions act as a drag, reducing overall performance. In a sideways or declining market, the shorts can shield the fund from losses. The strategy shines when there are genuine winners and losers.

If the manager’s picks are wrong, the strategy backfires. Long losses mount while short profits offer limited offset, resulting in underperformance of both absolute returns and relative to a simple long-only fund.

Risks and real drawbacks

Leverage amplifies losses if positions move against the fund. Short positions are theoretically unlimited in loss; a stock can rise indefinitely, so short-heavy periods can be volatile if the shorts move sharply higher.

Borrow scarcity is a risk. If many investors are short a particular stock, lenders may raise borrow fees or recall lent shares, forcing the fund to cover at unfavorable prices. Periods of market stress can make shorting expensive or impossible.

Volatility of short-side returns is often higher than long-side returns because losses on shorts can grow faster than gains. Even a balanced long-short fund can experience violent swings if its short picks surge.

Manager risk is paramount. The strategy depends entirely on the manager’s ability to identify stocks that will outperform and underperform. Long-short funds often underperform simple broad-market long-only funds over full market cycles.

Regulatory and capital requirements can constrain strategy. Short-selling is regulated; changes in rules or increases in borrow costs can reduce the strategy’s economics.

From innovation to mainstream ETF

Long-short equity began as an institutional hedge fund strategy available to the wealthy. By the 2020s, growth in retail investing led managers to launch long-short ETFs accessible to any investor. EHLS represents that democratization. The strategy is now available in a tax-efficient, liquid, low-minimum format.

That accessibility comes with tradeoffs. Traditional long-short hedge funds often carry lock-up periods and charge performance fees, both aligning manager incentives with long-term, risk-aware investing. An ETF like EHLS can be bought and sold daily, and fees are capped, but that liquidity may reduce manager discipline.

How to research it

Read the fund’s prospectus for the specific investment strategy, the manager’s track record, and the fee structure including borrow costs. Check the fund’s holdings to understand the manager’s convictions and concentration in key bets.

Examine the fund’s performance in different market environments. Did it protect against losses in downturns? Did it lag significantly in rising markets? Review past performance during periods of rising short stocks or high volatility to see how the strategy behaved under stress.

Compare EHLS’s returns, volatility, and risk-adjusted metrics to a simple stock-bond portfolio or a broad long-only equity fund to assess whether the long-short structure genuinely provides better risk-adjusted returns. Many long-short funds struggle to beat buy-and-hold approaches over long periods because the cost of shorting and active management erase gains from stock-picking.

For an investor considering EHLS, the decision centers on conviction in the manager’s stock-picking skill and whether reduced volatility and downside protection justify the higher expenses and structural limitations of the long-short approach.