A Long-Short Strategy involves simultaneously holding long positions in assets expected to appreciate and short positions in assets anticipated to decline. This investment approach aims to generate returns regardless of overall market direction by capitalizing on relative performance differences between assets. In crypto investing, it is employed by institutional traders to achieve alpha, hedge market risk, and mitigate volatility across a portfolio of digital assets.
Mechanism
The operational mechanism entails selecting a basket of cryptocurrencies or related derivatives, taking a long position in those deemed undervalued or poised for growth, and concurrently taking a short position in those considered overvalued or likely to decrease. The strategy relies on quantitative analysis and fundamental research to identify mispricings or divergences. Position sizing and risk allocation are critical components, often managed through automated trading systems that execute and rebalance trades.
Methodology
Implementing a long-short strategy requires robust analytical models for asset selection, precise execution infrastructure, and dynamic risk management protocols. The methodology involves continuous monitoring of market data, technical indicators, and on-chain metrics to identify optimal entry and exit points. It typically incorporates a neutral or near-neutral net market exposure to isolate specific alpha factors, allowing for performance that is less correlated with the broader crypto market’s directional movements.
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