Trends Watch: Long/Short Market Neutral Investing in Large-Cap & Mid-Cap Companies

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Edward Best, Founder, Best Capital Management.  

What is your outlook for U.S. equity long/short market neutral investing in large-cap and mid-cap companies? 

We believe now is an opportune time for investors to consider increasing diversification within their domestic equity portfolios. The current U.S. large-cap equity market is highly concentrated, with a significant portion of returns being driven by just a handful of mega-cap stocks. In fact, the cap-weighted Russell 1000 Growth Index allocates approximately 51% to just seven companies: Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Amazon (AMZN), Meta (META), Alphabet (GOOGL/GOOG), and Tesla (TSLA)—collectively known as the "Magnificent Seven." 

Given this level of concentration, we believe investors should explore uncorrelated strategies. A well-constructed long/short market-neutral portfolio offers low market beta, minimal exposure to broad market movements, and low correlation to traditional equity and bond indices. These characteristics can provide a valuable source of diversification in an increasingly top-heavy market environment. 

What are the benefits of shorting in a market neutral strategy? 

Shorting serves two primary purposes in a long/short market-neutral framework: return generation and risk mitigation. 

First, shorting allows investors to capitalize on insights about companies that are likely to underperform. Think of it like investing against a portfolio manager who consistently underperforms the market. If that manager's picks typically lag, there is a compelling case for profiting from that underperformance by shorting similar names. 

Second, shorting provides powerful risk control. Consider this example: suppose we believe Alphabet (GOOGL) will outperform Meta Platforms (META). By taking a long position in GOOGL and a short position in META, we create a paired trade. If a macro event—such as an advertising market downturn—impacts both companies negatively, we still expect GOOGL to outperform META. In that case, the losses from the GOOGL long may be more than offset by the gains from the META short. This approach helps isolate relative performance and can reduce exposure to market, sector, or thematic risks. 

Where do you see the greatest opportunities and why?  

Traditional long-only equity strategies typically exhibit annualized volatility of around 20%, with long-term average returns in the 8% range. Statistically, that implies two-thirds of annual returns fall between -12% and +28%, and 90% within a much broader -32% to +48% range—figures that suggest considerable variability in year-to-year performance. 

In contrast, long/short market-neutral strategies aim to remove general market exposure, significantly reducing volatility. With reduced correlation to broader indices, these strategies may serve as effective diversifiers. Many investors leverage these strategies to amplify potential returns while maintaining risk at acceptable levels. 

In today’s higher interest rate environment, these strategies have another tailwind: positive carry on short positions. Proceeds from short sales are typically held in cash-equivalent instruments and now earn meaningful interest—something not seen during the post-2008 era of near-zero rates. This incremental yield provides a helpful boost to total returns, complementing the return generated by the long and short positions. 

What are the greatest challenges you face and why? 

As an emerging manager, our primary hurdle is building visibility and raising capital. Prior to the 2010s, Wall Street banks often incubated hedge funds, providing seed capital and strategic support. The implementation of the Volcker Rule effectively ended that practice. 

Today, third-party marketers and capital introduction teams are generally reserved for managers with substantial assets already under management, creating a chicken-and-egg challenge for emerging managers looking to scale. 

What keeps you up at night? 

We remain deeply concerned about the potential fallout from inflated asset prices and the risk of market bubbles bursting—with significant secondary effects. Key areas of concern include: 

• U.S. Federal Debt: At over $36 trillion, the national debt is on an unsustainable trajectory. As deficit spending continues, we face difficult questions: Which programs will be cut? Who will bear the tax burden necessary to restore fiscal balance? 
• Cryptocurrencies: While digital assets like Bitcoin have attracted substantial investment, their valuations remain volatile and arguably speculative. A prolonged sell-off could not only impact crypto-currency investor wealth but also reduce spending in related segments of the economy that are currently buoyed by crypto-generated gains. 

These systemic risks underscore the importance of uncorrelated, risk-managed strategies that aim to perform regardless of broader market direction. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.