Unlimited HFEQ Equity Long/Short ETF (HFEQ)

The Unlimited HFEQ Equity Long/Short ETF (ticker HFEQ) is a fund that bets on stock-picking skill. It buys stocks it thinks are too cheap and sells short stocks it thinks are too expensive. The two bets offset each other — if the whole market rises or falls, the longs and shorts move together. What remains is pure stock-picking: profit from being right about which companies are mispriced relative to each other.

The simple idea

Most equity funds are bullish. You buy stocks, you hope they rise, your return depends on markets going up. A long/short fund flips the equation. It holds two equal-sized portfolios: one of stocks expected to outperform (the longs), and one of stocks expected to underperform (the shorts). If the longs rise and the shorts fall, the fund wins. If the longs fall and the shorts rise, the fund loses. If both move in the same direction by the same amount, the fund breaks even.

The genius is that this structure removes market timing from the equation. A traditional equity fund manager has to decide whether the entire market is overvalued or undervalued. If they are wrong — if they think the market will fall and it rises — they underperform badly. A long/short manager does not care about the market’s direction. They only care about relative value: is this stock mispriced against that stock, or against the sector, or against history.

How the strategy actually works

The fund’s process usually begins with analysis of valuations, growth rates, profitability, balance-sheet strength, and competitive position. The manager (or the systematic model) identifies stocks that look genuinely cheap on a basket of metrics, and stocks that look richly priced. The cheap ones become the long book. The expensive ones become the short book. Position sizes are balanced so that the fund is not betting on the market going up or down — the beta is close to zero.

In practice, this means the fund will own several hundred long positions and several hundred short positions simultaneously. They are positioned to cancel each other out at the market level. A 10 percent rise in the S&P 500 should not materially affect the fund’s value (holding style differences and individual stock bets aside). But if the portfolio’s longs rise 15 percent and the shorts fall 5 percent, the fund gains 10 percent, because the longs beat the market while the shorts underperformed.

Why short at all?

Shorting adds return and reduces volatility. If a manager only held long positions in undervalued stocks, they would still be exposed to broad market risk — if the market crashes, even cheap stocks fall. But by holding short positions in overvalued stocks, the manager hedges that market risk. The portfolio becomes less volatile and less correlated to traditional equity indices.

There is also a funding advantage. The proceeds from short sales are held as collateral and can be reinvested in long positions. This creates a kind of leverage without borrowing — you can own a net portfolio of, say, 100 percent long and 100 percent short, which is a 200 percent gross exposure, funded entirely by the short proceeds.

The hidden difficulty

This sounds elegant on paper. In reality, it is brutally hard to execute. The first problem is that shorting is expensive and administratively awkward. You have to borrow shares to short them (a broker charges you for the loan), and you have to keep borrowing for as long as you hold the short. If a stock becomes hard to borrow — perhaps because many others are shorting it, or because a squeeze is building — the borrow cost can skyrocket and destroy your economics.

The second problem is that the strategy requires genuine stock-picking skill. If you are no better than the market at spotting which stocks are expensive and which are cheap, then your longs will not outperform and your shorts will not underperform. You break even (minus costs) even if you execute perfectly. Over decades, the evidence suggests that most managers — even skilled ones — struggle to outperform a simple index once you account for fees, trading costs, and the drag from shorting friction.

The third problem is tail risk. Shorting has unlimited downside in theory (if a stock you have shorted rises infinitely, your losses are infinite). In practice, a well-managed long/short fund uses stops and limits and position sizing to prevent that. But historically, short squeezes and sudden reversals in expensive stocks have destroyed long/short portfolios, especially during market panics when everyone tries to exit shorts at once.

Who is this fund for

A long/short equity ETF appeals to investors who believe that skilled managers can pick stocks and who prefer a lower-volatility path to equity returns. It also appeals to those who want equity exposure but are uncomfortable with traditional market timing — the idea is that you avoid the decision of whether the market is overvalued, and instead delegate to the manager’s stock-picking process.

It is less appealing to those who believe markets are efficient and that stock-picking skill is rare, or to those who simply want the most liquid, lowest-cost equity exposure possible (which is a broad market index fund). It also requires more patience: long/short funds often underperform broad equity indices during strong bull markets, when any stock — even bad ones — can rise. You are paying for the hedge. If you never experience a downturn, you never get the payoff.

Tracking, costs, and real-world performance

Like most actively managed funds, HFEQ charges an expense ratio that reflects the cost of research, portfolio management, and trading. That fee eats directly into the fund’s net returns. If the portfolio’s gross alpha (the outperformance from good stock picks) is 2 percent a year, but the expense ratio is 1.5 percent, the net alpha is only 0.5 percent. That 0.5 percent has to compensate for the effort and risk involved.

Additionally, every time the manager rebalances the long and short books — trimming winners, adding losers, recycling positions — the fund incurs trading costs. These are not always visible in the expense ratio but they still reduce returns.

Over time, a long/short equity ETF should be held for years, not months. The strategy is meant to outperform during drawdowns and underperform during strong bull runs. Short-term volatility is high because individual stock positions can swing wildly. Patience is required to let the stock-picking edge work through a full market cycle.

How to evaluate HFEQ

Start with the prospectus and fact sheet. Understand the strategy, the expense ratio, the fund size, and the trading volume. Then look at performance during at least two full market cycles — one bull market and one bear market. Did the fund outperform a simple equity index during the bear market? Did it underperform during the bull market? By how much? Also examine the volatility and drawdown versus a 60/40 portfolio. If the fund had lower volatility and a shallower drawdown, it may have been doing its job. If not, you are paying for hedge without getting one. Finally, consider whether the expense ratio and the historical alpha (if any) justify the added complexity.