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Reply to @equalizer: I see a five cent spread between bid/ask on ALFA. Long-term, I'd rather be in ALFA than GURU. I'm not in either, but that's my view.
I'll be more specific. I was testing this assertion: "One ought to be careful about comparing day to day results in long/short funds. Being up on both up and down days are very rare exceptions or a coincidence."
That appears to not be the case as a blanket statement.
Everything is in context. This was in reply to your post saying
Really impressive two day stretch ...
If a fund's net market exposure is quite small, then I don't see why it is too surprising that if they had chosen their longs and shorts well that they could do well on consecutive days of opposite market performance without having to reposition their portfolio in rapid fashion.
That happens only in some sporadic periods because it is very difficult to be in that position on a daily basis. Market neutral is a very misunderstood term. It just means that over a long enough period of time, there is low correlation between market movement and fund movement, not that the fund is fully hedged almost every day. The only perfect market neutral investment is cash measured in the same currency or perfectly hedged using inverse instruments. That provides zero returns. Everything else is a bet. For example, you can go long Google and short Apple and in theory buy hedges against those positions to be neutral to movements in QQQ. M&A funds do something similar going long on acquired and short on acquirer with market hedges.
On a day to day basis, any two such stocks will move in all possible directions relatively and so depending on how the allocation was made between them, the fund can do well or badly. Market neutral funds don't aim to be up on as many days as possible. They bet on being right in both long and short selections over the holding period. But that doesn't necessarily beat the corresponding index, say NASDAQ if the fund is full hedged, especially if NASDAQ keeps going up. Moreover, the investment thesis that selected that long and short positions doesn't hold forever and the fund will eventually find itself on the wrong side and wind down. Timing it to unwind before that happens is impossible to do consistently. This takes time for a fund and creates a drag on the performance until they unwind those positions. A reasonable expectation for a long short fund is about 6% annualized returns over a long period because of the drags of hedging and unwinding positions. But that is acceptable if the fund reduces volatility and the market is going down or flat. It can lag in bull markets and wrong bets and other manager risks can make them not reach that target either.
Funds can sometimes overperform in short periods or when initially starting out with low assets and a well researched initial position and a well-timed fund start. The fund doesn't have that luxury later on.
Just pointing out that it is good to have a realistic expectation of funds like this despite their short term performance either on a day to day basis or over the long term.
Didn't realize posting this kind of thing was offensive, so back to lurking...
Comments
No need to go back to lurking. I don't know if you offended anyone. (?)
On a day to day basis, any two such stocks will move in all possible directions relatively and so depending on how the allocation was made between them, the fund can do well or badly. Market neutral funds don't aim to be up on as many days as possible. They bet on being right in both long and short selections over the holding period. But that doesn't necessarily beat the corresponding index, say NASDAQ if the fund is full hedged, especially if NASDAQ keeps going up. Moreover, the investment thesis that selected that long and short positions doesn't hold forever and the fund will eventually find itself on the wrong side and wind down. Timing it to unwind before that happens is impossible to do consistently. This takes time for a fund and creates a drag on the performance until they unwind those positions. A reasonable expectation for a long short fund is about 6% annualized returns over a long period because of the drags of hedging and unwinding positions. But that is acceptable if the fund reduces volatility and the market is going down or flat. It can lag in bull markets and wrong bets and other manager risks can make them not reach that target either.
Funds can sometimes overperform in short periods or when initially starting out with low assets and a well researched initial position and a well-timed fund start. The fund doesn't have that luxury later on.
Just pointing out that it is good to have a realistic expectation of funds like this despite their short term performance either on a day to day basis or over the long term. Offensive to whom? Not sure why you think that.