What Is 'Dedicated Short Bias'

Dedicated short bias is a hedge fund strategy that maintains a net short exposure to the market through a combination of short and long positions. A dedicated short bias investment strategy attempts to capture profits when the market declines by holding investments that are overall biased to the short side. Dedicated short bias funds will still maintain a hedge of sorts with long positions in some securities to minimize losses when a bull market is in force, but they are designed to profit when a bear market sets in.

Breaking Down 'Dedicated Short Bias'

A dedicated short bias is a directional trading strategy that entails taking a net short position in the market, meaning that a larger proportion of the portfolio is dedicated to short positions rather than to long positions. Being net short is the opposite of being net long; hedge funds that maintain a net long position are, of course, known as dedicated long bias funds. Dedicated short bias funds include instruments such as ProShares UltraShort 20+ Year Treasury, PowerShares DB US Dollar Index Bearish, Short Dow30 ProShares and so on. An investor should be able to tell from the name that a fund or ETF has a dedicated short bias.

From Shorting to a Short Bias

Prior to the long-term bull market for U.S. equities that took place in the 1980s and 1990s, many hedge funds used a dedicated short strategy, rather than a dedicated short bias strategy. The dedicated short strategy was one that exclusively took short positions. The dedicated short funds were virtually destroyed during the bull market; the dedicated short bias fund emerged and took a more balanced approach. The long holdings are enough to keep losses manageable, although funds can still run into problems with leverage and capital flight if losses continue for too long.

The Challenge of Maintaining a Dedicated Short Bias

Committing to a bias, whether long or short, puts these hedge funds in a tight spot operationally. Even when a bull market has continued to gore a hedge fund for a long period of time, the fund manager must reposition again and again to establish the net short as the long positions grow in value. Of course, when the market eventually reverses, these dedicated short bias funds race ahead.

There are other hedge fund strategies that allow the fund manager to go long and short without worry about which way the bias is tilted. These hedge funds are not market neutral, but they allow positional shifting with the goal of maximizing profits regardless of the overall market direction. Interestingly enough, these long/short equity funds often have a dedicated long bias that emerges naturally over time. That said, these more flexible arrangements will have difficulty matching the performance of a dedicated short bias fund when the market is in a prolonged decline because there will be a lag time in adjusting positions that short fund won't have to deal with.

  1. Bias

    Biases are human tendencies that affect our behavior and perspective, ...
  2. Sample Selection Bias

    Sample selection bias is a type of bias caused by using non-random ...
  3. Dedication Strategy

    Dedication strategy is an asset management method by which the ...
  4. Survivorship Bias

    Survivorship bias is the tendency to view the fund performance ...
  5. Short Covering

    Short covering is buying back borrowed securities in order to ...
  6. Dedicated Portfolio

    A dedicated portfolio is an investment portfolio where the cash ...
Related Articles
  1. Financial Advisor

    Behavioral Finance Tips for Advising Your Clients

    Here's how advisors can prevent clients from making irrational investment decisions.
  2. Investing

    5 Mental Mistakes That Affect Stock Analysts

    They know more about stocks than the average person, but analysts are still affected by biases. Find out what they are.
  3. Investing

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  4. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  5. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
  6. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  7. Trading

    How To Protect A Short Position With Options (FB, AAPL)

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  8. Investing

    Why Hedge Funds Do Not Belong in Your Portfolio

    Considering hedge funds as part of your investment strategy? Make sure you understand all the risks and fees involved.
  1. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  2. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
  3. How does one make money short selling?

    Short sellers make money by betting a stock they sell will drop in price. If it drops, the short seller buys it back at a ... Read Answer >>
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  5. What's the difference between a long and short position in the market?

    Long positions in a stock portfolio refers to stocks that have been bought and are owned, whereas short positions are those ... Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center