Equity Research terms
- 63
- terms
Accounting18
- Accounts receivable
- Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
- Accrual accounting
- Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
- Amortization
- The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
- Balance sheet
- A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
- Capital expenditures (capex, CapEx)
- Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
- Cash flow statement
- Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
- Deferred revenue
- Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, Net working capital
- Deferred tax liability (DTL)
- Taxes a company will owe later because it reported more income on its financial statements than on its tax return, usually because it depreciates assets faster for tax. It also appears in acquisitions when assets are written up in a stock deal, since the extra book depreciation is not tax deductible.ExampleA $100m asset is depreciated over 5 years for tax and 10 years on the books. In year one, tax depreciation is $20m versus $10m on the books, so at a 25% rate a $2.5m deferred tax liability builds.See also Depreciation, Balance sheet
- Depreciation
- Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
- Goodwill
- What an acquirer pays above the fair value of the target's identifiable net assets. It sits on the balance sheet, is not amortized by US public companies, and is tested at least once a year for impairment.ExampleA buyer pays $500m for a company whose identifiable assets are worth $400m at fair value and whose liabilities are $150m. Net assets are $250m, so goodwill is $250m.See also Amortization, Balance sheet
- Gross margin
- Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
- Income statement
- Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
- Levered free cash flow (LFCF, free cash flow to equity, FCFE)
- Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
- Net income
- The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
- Net working capital (NWC)
- Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue
- Operating income (EBIT)
- Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow
- Stock-based compensation (SBC)
- Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method
Recruiting17
- Bulge bracket
- The largest global investment banks, which do every product at scale: Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America, and Citi, with Barclays, UBS, and Deutsche Bank often included.ExampleAn analyst in a bulge bracket industrials group might work on a bond issue, a $2bn acquisition, and a share buyback for the same client in one year, with the bank's lending and trading desks involved.See also Elite boutique, Middle market, Sell side
- Buy side
- Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund
- Coffee chat (informational interview)
- A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
- Diversity program
- An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
- Fit interview (behavioral interview)
- The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
- Front office
- Revenue-generating roles that face clients or take risk: bankers, traders, salespeople, research analysts, and investors. Most recruiting conversations are about front office seats.ExampleA trader on the rates desk is front office. The product controller who reconciles her P&L each night is middle office, and the engineer running the settlement system is back office.See also Middle office, Sell side, Buy side
- HireVue
- A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday
- Networking
- Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
- On-campus recruiting (OCR)
- The process where firms post jobs and interview through your school's career center. Schools where firms recruit heavily get the most slots; elsewhere, networking and direct applications carry more weight.ExampleAt a school with OCR, a bank posts its role on the career portal, collects resumes, and runs first rounds in campus interview rooms. At a school without it, you apply online and lean on referrals.See also Networking, Summer analyst
- Return offer
- A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
- Rolling admissions (rolling applications, rolling basis)
- Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment
- Sell side
- Firms that sell services and securities to companies and investors: investment banks, sales and trading desks, and equity research. Many people start here and later move to the buy side.ExampleAn equity research analyst at a bank raises her price target on a retailer from $80 to $95. Her readers are buy-side investors, and her bank earns when they trade through its desks.See also Buy side, Bulge bracket, Front office
- Sophomore program
- An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst
- Stock pitch
- A recommendation to buy or short a stock, backed by a thesis, a valuation, catalysts, and risks. It is the core interview task for hedge fund, asset management, and equity research roles. Have two ready: one long and one short.ExampleLong a regional bank at $40: it trades at 8x earnings versus peers at 11x, and cheaper deposits are the catalyst. At 10x the stock is $50, 25% upside; the risk is commercial real estate losses.See also Long/short equity, Comparable companies analysis
- Summer analyst
- The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
- Superday
- The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
- Technical interview
- Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO
Valuation14
- Beta
- How much a stock tends to move relative to the market. A beta of 1.2 means the stock has historically moved about 1.2% for each 1% move in the market. It feeds the cost of equity through CAPM.ExampleA stock with a beta of 0.8 would be expected to rise about 4% when the market rises 5%. Utilities often sit below 1; fast-growing tech names often sit above it.See also Capital asset pricing model, Cost of equity, Alpha
- Capital asset pricing model (CAPM)
- A formula for the return equity investors require: cost of equity = risk-free rate + beta x equity risk premium. With a 4% risk-free rate, a beta of 1.2, and a 5% premium, the cost of equity is 4% + 6% = 10%.ExampleWith a 4.5% risk-free rate, a beta of 0.9, and a 5.5% equity risk premium, cost of equity = 4.5% + 0.9 x 5.5% = 4.5% + 4.95% = 9.45%.See also Beta, Cost of equity, Weighted average cost of capital
- Comparable companies analysis (trading comps, comps)
- Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field
- Cost of equity
- The annual return shareholders expect for owning a company's stock, usually estimated with CAPM. It is higher than the cost of debt because shareholders are paid last and dividends, unlike interest, are not tax deductible.ExampleA company borrows at 6%, or 4.5% after a 25% tax rate, while its cost of equity is 10%. Shareholders take more risk, get paid last, and give the company no tax deduction.See also Capital asset pricing model, Weighted average cost of capital, Beta
- Discounted cash flow (DCF)
- Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value
- Enterprise value (EV, TEV)
- The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
- Equity value (market capitalization, market cap)
- The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio
- EV/EBITDA multiple (EV/EBITDA)
- Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis
- Perpetuity growth method (Gordon growth method)
- Estimating terminal value by assuming cash flow grows at a constant rate forever: TV = final-year FCF x (1 + g) / (WACC - g). The growth rate should be at or below long-run economic growth, often 2% to 3%.ExampleFinal-year FCF of $100m, 2% growth, and a 9% WACC: TV = $100m x 1.02 / (0.09 - 0.02) = $102m / 0.07, about $1,457m.See also Terminal value, Exit multiple method, Weighted average cost of capital
- Price-to-earnings ratio (P/E, P/E ratio)
- Share price divided by earnings per share, or equally equity value divided by net income. A $50 stock with $2.50 of EPS trades at 20x. Leverage and tax rates affect it, so it compares best across similar companies.ExampleNet income of $200m on 100m shares is EPS of $2.00. At a $36 share price the P/E is 18x, and equity value of $3.6bn over $200m of net income gives the same 18x.See also Equity value, Net income, Comparable companies analysis
- Terminal value
- The value of all cash flows after the projection period in a DCF, calculated with the perpetuity growth or exit multiple method. It often makes up more than half of a DCF's total value, so its assumptions deserve the hardest look.ExampleA DCF with $400m of discounted projection-period cash flows and $600m of discounted terminal value gets 60% of its $1bn enterprise value from the terminal value.See also Discounted cash flow, Perpetuity growth method, Exit multiple method
- Treasury stock method (TSM)
- How diluted shares are counted: assume in-the-money options are exercised and the company uses the exercise cash to buy back shares at the current price. 100 options with a $10 strike and a $20 share price add 100 - (1,000 / 20) = 50 net new shares.ExampleA $40 stock with 1m options struck at $25: exercise brings in $25m, which buys back 625,000 shares at $40, so net dilution is 1,000,000 - 625,000 = 375,000 shares.See also Equity value, Stock-based compensation
- Unlevered free cash flow (UFCF, free cash flow to firm, FCFF)
- Cash the business generates before paying lenders or shareholders: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. It is the cash flow a DCF discounts at WACC.ExampleEBIT of $100m at a 25% tax rate gives $75m, plus $20m of D&A, minus $30m of capex and a $5m increase in NWC: unlevered free cash flow is $60m.See also Discounted cash flow, Weighted average cost of capital, Capital expenditures, Net working capital
- Weighted average cost of capital (WACC)
- The blended return required by all of a company's capital providers: WACC = E/(D+E) x cost of equity + D/(D+E) x cost of debt x (1 - tax rate). It is the discount rate for unlevered free cash flow in a DCF.Example70% equity at a 10% cost and 30% debt at 6% pre-tax with a 25% tax rate: WACC = 0.7 x 10% + 0.3 x 4.5% = 7.0% + 1.35% = 8.35%.See also Cost of equity, Capital asset pricing model, Discounted cash flow, Unlevered free cash flow
Venture and startups5
- ARR (annual recurring revenue, MRR)
- Annual recurring revenue: the yearly value of subscription contracts in force today. Software companies and their investors use it instead of reported revenue because it shows the run rate at a point in time.ExampleA startup billing $50k a month in subscriptions (its MRR) has $600k of ARR.See also Net revenue retention, Burn rate, Series A
- Customer acquisition cost (CAC)
- Sales and marketing spend divided by the number of new customers it brought in over the same period. Read next to lifetime value: a customer worth less than it cost to win loses money.ExampleA company spends $300k on sales and marketing in a quarter and adds 600 customers, a CAC of $500.See also Lifetime value, Unit economics, Burn rate
- Dilution
- The drop in an existing holder's ownership percentage when new shares are issued, in a funding round, an option grant, or a stock-funded acquisition. The holder keeps the same shares but owns a smaller slice.ExampleA founder owns 60% before a round that sells 20% of the company to new investors. Afterward the founder owns 60% x 0.80 = 48%.See also Cap table, Option pool, Accretion/dilution analysis
- Lifetime value (LTV, LTV/CAC)
- The gross profit a customer brings in over the whole time they stay. A simple version is monthly gross profit per customer divided by the monthly churn rate. Investors often want LTV at three times CAC or more.ExampleA customer pays $100 a month at an 80% gross margin, so $80 of gross profit. With 2% monthly churn the average customer stays 50 months: LTV is $4,000, eight times a $500 CAC.See also Customer acquisition cost, Unit economics, Net revenue retention
- Net revenue retention (NRR, net dollar retention)
- Revenue this year from the customers you had a year ago, divided by what they paid then. It counts upgrades and expansion and subtracts downgrades and churn. Above 100% means the existing base grows with no new customers.ExampleCustomers paying $10m of ARR a year ago pay $11.5m today after some leave and others buy more: NRR of 115%.See also ARR, Lifetime value
Consulting3
- Porter's five forces (five forces)
- A way to judge how profitable an industry can be: rivalry among existing players, the threat of new entrants, the threat of substitutes, the bargaining power of buyers, and the bargaining power of suppliers. Strong forces squeeze margins.ExampleAirlines face fierce rivalry, powerful suppliers (two big plane makers, unionized pilots), price-shopping buyers, and substitutes like trains on short routes, which helps explain thin margins.See also Value chain, Market sizing, Commercial due diligence
- Price elasticity (elasticity of demand)
- How much the quantity sold changes when price changes: the percentage change in volume divided by the percentage change in price. Above 1 in absolute value, a price rise loses revenue; below 1, it gains revenue.ExampleWith elasticity of -2, a 10% price rise cuts volume 20%. Revenue becomes 1.10 x 0.80 = 0.88 of what it was, a 12% fall.See also Profitability framework, Contribution margin
- Value chain
- The steps a product passes through from raw input to the customer, with who does each step and what margin each one earns. Mapping it shows where profit pools sit and where a client could move up or down the chain.ExampleCoffee runs from farms to traders, roasters, distributors, and cafes. If roasters earn 20% margins and cafes 8%, a cafe chain weighing whether to roast its own beans starts there.See also Porter's five forces, Issue tree, Commercial due diligence
M&A and deals2
- Follow-on offering
- A sale of shares by a company that is already public. If the company issues new shares it raises cash but dilutes existing holders; if existing holders sell their own shares, no new shares are created.ExampleA public company with 100m shares sells 10m new shares at $50, raising $500m and diluting existing holders by about 9% (10m of 110m). If its PE owner sells 10m of its own shares instead, the company raises nothing.See also Initial public offering, Underwriting
- Initial public offering (IPO)
- A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering
Markets and macro1
- Bull and bear markets (bull market, bear market)
- A bull market is a sustained rise in prices. A bear market is commonly defined as a fall of 20% or more from a recent high.ExampleAn index peaks at 5,000 and falls to 3,900, a 22% drop, so it is in a bear market. A fall to 4,200, 16%, would only be a correction.See also Risk-on and risk-off, VIX
Trading and products1
- Short selling (shorting)
- Borrowing a stock, selling it, and buying it back later to return it, profiting if the price falls. Losses have no ceiling, because the price can keep rising.ExampleShort 1,000 shares at $50 and you receive $50,000. Buy them back at $40 and you keep $10,000 before borrow costs; if the stock goes to $90 instead, you lose $40,000.See also Long/short equity, Hedging
Quant1
- Linear regression (regression)
- Fitting a straight line y = a + b x to data by minimizing the sum of squared errors. The slope b says how much y moves per unit of x on average. It is how beta is estimated and the first model most quant researchers try.ExampleRegressing a stock's daily returns on the market's gives a slope of 1.3: on average the stock moves 1.3% for each 1% move in the market.See also Beta, Correlation, Overfitting
Funds and investing1
- Long/short equity (long/short)
- Buying stocks you expect to outperform and shorting ones you expect to lag, so returns depend more on stock picking than on the market's direction. It is one of the most common hedge fund strategies.ExampleLong $10m of a stronger retailer and short $10m of a weaker one. The sector sells off: the long falls 8% (-$0.8m), the short falls 15% (+$1.5m), and the pair makes $0.7m in a down market.See also Short selling, Hedge fund, Stock pitch