Swimming Through Turbulence: How Long-Short Strategies Can Keep Your Portfolio Afloat

Author: Shoaib Zaman, Certified Financial Planner

Equity investing today can feel like swimming in rough seas. Indian stock markets in 2026 have been rocked by strong waves in the form of wars, higher energy prices, a weaker currency and foreign investment outflows. The incoming tide of higher inflation, tighter monetary policy, below average monsoons forecast and slowing domestic demand is may weigh on corporate earnings. In such volatile times, investors cannot simply stop swimming in the long-term, wealth-creating potential of equities. Because staying out of the markets may mean missing out on eventual recoveries and long-term compounding opportunities that have historically rewarded patient investors. But a life jacket can certainly make the journey easier. That proverbial life jacket is diversification and dynamic portfolio management.

As the geopolitical situation in the Middle East drags on without a resolution in sight, raw material costs and supply chains of many Indian businesses, and in turn their earnings, are coming under pressure. But equity investing is nuanced. Market disruptions don’t affect all businesses uniformly, and periods of uncertainty create both risks and opportunities across sectors, business models and market capitalisations. For instance, sectors or businesses with higher exposure to crude oil may be impacted more severely than those that are less dependent on crude and its byproducts. Export-oriented businesses may benefit from a weaker rupee even as import-dependent businesses see their margins shrink. A diversified business group may be better insulated from geoeconomic shocks than one concentrated in a single product or service. A larger business with deep reserves may be able to better absorb market disruptions than a mid-cap or small cap peer. A business with global revenues may face more uncertainty than one that is focused primarily on domestic markets. As such, a strategy that can tactically diversify across large, mid, small sized businesses and the various sectors, depending on their exposure to war-related risks and their ability to navigate them, can reduce risk of portfolio downside.

While traditional equity mutual funds are long only strategies that offer portfolio diversification as a means of managing risk, risk management can potentially be taken a step further in these uncertain times through Specialised Investment Funds (SIFs). Requiring a minimum investment of Rs 10 lacs, these funds, are permitted to use sophisticated derivative strategies to manage portfolio risk. Thus, these funds can not only diversify their portfolios across different market segments but can also hedge their exposure using derivatives, potentially strengthening portfolio outcomes.

An Equity Long-Short SIF is one such fund. This fund, as the name suggests, invests in a diversified basket of equities while using long-short strategies to take advantage of rising or falling asset prices. It goes long on securities it expects to appreciate going forward and short on those expected to see a price decline.

For example, the fund may go long on or buy a strong export company expected to benefit from rupee weakness. Simultaneously, it may short a company heavily dependent on imported raw materials. This can potentially reduce downside during market corrections, smooth returns, and lower volatility compared to a purely long-only equity portfolio.

In other words, just as a life jacket doesn't stop the storm but keeps you afloat through the waves, an Equity Long-Short SIF doesn't eliminate market risk — it gives your portfolio the buoyancy to ride out volatility rather than sink with it. Thus, in uncertain markets, investors need not abandon equities altogether. Instead, the focus should shift towards smarter diversification and more active risk management, including vehicles such as Equity Long-Short SIFs.