If you looked at a VC's portfolio, would it be truly 100% long? Or are they figuring out a way to take a short position in private companies? (Either literally or through something akin to Credit Default Swaps, etc)?
Any insight, or precedent would be appreciated.
The VC fund is the entity that holds shares in the portfolio companies. The fund is purely long and unhedged. They try to minimize losses by being selective about their investments and negotiating contractual protections that reduce their downside risk (e.g. anti-dilution protection and redemption rights). But at the end of the day, they hope that their portfolio will include enough successful exits to cover losses and unsuccessful exits.
The VCs themselves are investment managers. They control the investments of the fund and they are generally compensated based on (a) percentage of the assets under management and (b) a percentage of the return.
(a) is supposed to enable the management firm to pay staff and support the costs of finding and managing investments. (b) is supposed to incentive the managers to maximize returns to the limited partners providing capital to the fund. In practice it's a bit muddier, as sometimes the managers will defer fees or co-invest in portfolio companies alongside their funds. But the basic idea is that the managers will make some money regardless of how the fund does, and they stand to make a lot more if the fund does well. You might cynically say the managers are "hedged" even though that is not strictly true.
A better question is whether venture capital (or private equity, for that matter) performs well as an asset class after all of these fees. See, e.g. http://www.kauffman.org/~/media/kauffman_org/research%20repo...