What Is a Long-Only Fund and How Do They Work?

A long-only fund is a common investment vehicle used by individuals seeking financial market exposure. These funds pool money from investors to acquire a portfolio of securities, offering a professionally managed and diversified approach. They aim to participate in asset growth over time.

Defining Long-Only Funds

A “long-only” fund exclusively holds “long” positions in financial assets. This means the fund buys securities expecting their market value to increase. The core principle of a long position is profiting from an asset’s appreciation.

These funds do not engage in “short selling,” which involves borrowing and selling securities to repurchase them later at a lower price, profiting from a decline. They also avoid complex derivatives for speculative purposes, whose values fluctuate based on underlying assets like stocks or commodities. This approach focuses on long-term capital appreciation, not profiting from market downturns or employing high-risk, leveraged strategies.

Investment Approach and Asset Allocation

Long-only funds operate by buying and holding assets, aiming to benefit from their appreciation over an extended period. They commonly invest across traditional asset classes such as stocks (equities) and bonds (fixed-income securities). Some funds may also include real estate or commodities, provided these are held as direct, long positions.

Funds may specialize in a single asset class, like an equity or fixed-income long-only fund, or diversify across multiple asset classes to balance risk and potential returns. Management can be active, where professional managers select specific securities, or passive, where the fund tracks a market index. The fund’s investment objectives are detailed in its prospectus, a legal document.

Structures for Long-Only Funds

Long-only investment strategies are housed within various structures accessible to investors. Two common structures are mutual funds and exchange-traded funds (ETFs). Mutual funds are purchased directly from fund companies or through investment professionals and are priced once daily at their net asset value (NAV) after market close.

ETFs trade on stock exchanges throughout the day, similar to individual stocks. Both pool investor money to buy diverse portfolios. Long-only strategies can also be implemented through separate accounts managed directly for individual clients, providing a customized investment experience.

Key Considerations for Investors

Investors evaluating long-only funds should assess several factors to align with their financial objectives. Diversification is a benefit, as these funds hold a variety of securities across different companies or sectors, which helps mitigate risk compared to investing in single stocks. Liquidity varies by structure; mutual funds allow shares to be bought or sold at the end of each business day, while ETFs trade throughout the day on an exchange.

Costs are an important consideration, including the expense ratio, an annual fee expressed as a percentage of the fund’s assets. ETFs may also involve trading commissions when bought or sold through a brokerage. Long-only funds suit investors with a long-term investment horizon, typically five years or more, as their strategy aims for capital appreciation over extended periods. Funds disclose their holdings regularly, offering transparency to investors.