Can anyone explain this- long short equity strategy
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A long-short equity strategy is a market-neutral approach that involves buying undervalued stocks while simultaneously selling short overvalued stocks. In this strategy, the investor is not concerned with the direction of the overall market, but rather with the relative performance of individual stocks.
The use of leverage can enhance the returns of a long-short equity strategy. Leverage refers to borrowing money to invest in securities. By using leverage, the investor can increase the amount of capital available to invest, which can magnify the potential returns.
However, leverage also magnifies the potential losses. If the portfolio experiences losses, the investor will still be required to pay back the borrowed funds, which can result in significant losses.