Australia’s investment landscape is evolving fast, and 2025 is shaping up to be the year that long/short funds step into the limelight. Once reserved for elite hedge funds, these dynamic investment vehicles are now accessible to a broader range of investors. But what exactly are long/short funds, how do they work, and what’s driving their popularity in the current market?
Understanding Long/Short Funds: More Than Just a Hedge
At their core, long/short funds are designed to generate returns in both bull and bear markets. They do this by taking ‘long’ positions (buying assets they expect to rise) and ‘short’ positions (selling assets they expect to fall). This approach allows managers to pursue absolute returns, aiming to outperform in volatile or sideways markets—something traditional funds can struggle with.
- Long positions: Buying shares or assets in companies expected to increase in value.
- Short positions: Borrowing and selling shares expected to decline, with the intention of buying them back cheaper.
For example, an Australian long/short equity fund might buy shares in a fast-growing lithium producer (long) while shorting an overvalued retail chain facing headwinds (short). If the lithium stock rises and the retailer falls, the fund benefits from both moves.
Why Long/Short Strategies Are Gaining Ground in 2025
Several factors are fueling the rise of long/short funds among Australian investors in 2025:
- Market volatility: ASX indices have seen heightened swings as global interest rate cycles shift and geopolitical risks persist.
- Policy updates: ASIC’s 2025 review of managed fund disclosures has pushed for greater transparency in risk and strategy, making it easier for retail investors to compare long/short offerings.
- Demand for diversification: Investors are increasingly looking beyond passive ETFs for options that can cushion against downturns and exploit market mispricings.
- Technology and accessibility: New platforms and lower minimum investments have brought institutional-grade strategies to everyday Australians.
According to Morningstar data released in April 2025, Australian-domiciled long/short funds saw net inflows rise by 18% year-on-year, with several outperforming traditional equity funds during the market turbulence of late 2024.
Key Considerations Before Investing
While the appeal is clear, long/short funds aren’t a silver bullet. Here’s what to keep in mind:
- Manager skill is critical: Success hinges on the fund manager’s ability to pick winners and losers. Past performance doesn’t guarantee future results, so scrutinise the team’s track record and alignment of interests.
- Costs can be higher: Expect management fees of 1–2% plus performance fees, often around 15–20% of positive returns. Compare these to passive and traditional active funds.
- Complexity and risk: Short selling adds complexity and can amplify losses. If a shorted stock rises sharply, losses can exceed the initial investment.
- Liquidity matters: Some long/short funds have redemption restrictions, especially during volatile periods. Check the fund’s liquidity terms and gate provisions.
- Regulatory scrutiny: The Australian Securities & Investments Commission (ASIC) has ramped up oversight of leverage and derivatives use in 2025, demanding clearer reporting and risk controls from fund managers.
For example, one prominent ASX-listed long/short fund outperformed peers in early 2025 by successfully shorting overhyped tech stocks while holding long positions in resource exporters benefiting from the green energy boom. However, others lagged due to poor short bets or crowded trades.
The Bottom Line: Is a Long/Short Fund Right for You?
Long/short funds are carving out a bigger role in Australians’ portfolios as investors look for new ways to navigate uncertainty. They can offer genuine diversification and downside protection, but they require a higher tolerance for risk and an understanding of the underlying strategies. In 2025, with enhanced regulatory oversight and greater access, these funds present a compelling—but complex—option for investors willing to do their homework.
