Consider a hedge fund with a hypothetical initial equity of £ 1,000,000 to invest. The investment company’s strategy involves a long and a short position in equities Ax and Bz. Assume that the positions the hedge fund takes are £900,000 long in Ax and £800,000 short in Bz.
Assume that the Ax shares increase from £10 to £11 and pay an additional £1 dividend at the end of the month. Also assume that the shares of Bz have also increased from £10 to £10.25 and also paid a £0.25 dividend at the end of the month. If the interest paid on the short proceeds are 6% p.a. the unused capital can be invested at the same percentage. Finally if the interest fee on the short position is 1% p.a. then calculate the total P/L of the position.