A long/short equity investing strategy takes long positions on stocks that are expected to appreciate, and short positions on stocks that are expected to decline.The strategy lets investors bet on both while minimizing market exposure. Ideally, investors profit from gains in the long position and declines in the short. The strategy still works, though not as profitably, if one position generates more profit than the other loses. The “pair trade” involves offsetting a long position on a stock with a short position on another stock in the same sector. For example, an investor who studies tech stocks believes ABC Corporation’s shares are about to rise in value with the debut of its latest software. The investor also expects XYZ Company’s stock to fall because its newest software is having problems. The investor buys 1,000 shares of ABC at $33 each, and 1,500 shares of XYZ at $22 each to ensure equal purchases. If ABC climbs to $35, and XYZ falls to $21, the investor makes $3,500. If XYZ fixes its software and its stock climbs to $23, the investor still makes $500. Since stocks in the same sector frequently rise and fall together, many investors who employ long/short equity strategies will use stocks from different sectors, like energy and technology. Many hedge funds use the long/short strategy. Some use a market neutral approach and invest equal dollar amounts in both positions. Others use a long bias, the most popular being a 130-to-30 split. For example, they’ll sell short $30 and add it to a $100 long investment, ending up with $130 in a long investment and $30 in a short one.