LSOFX LS Opportunity Fund 2013 Year-end Report

Charles

The following chart shows Huber’s data for the small capitalization (“small cap”) universe highlighted by the Russell 2000 Value index. It quickly becomes evident that the universe of available small cap securities begins to materially shrink as total fund AUM grows past $500 million. At $1 billion AUM, the investable universe shrinks by almost 50%; at $2 billion AUM, the universe shrinks by 75%!

I found their discussion on impact of AUM on fund performance pretty interesting, especially implications for long/short funds:

Asset growth continues to accelerate in the liquid alternative mutual fund category. While the growth has been substantial, it has also been highly concentrated in a small number of individual funds. Drilling down into the long/short equity mutual fund category, as defined by Morningstar, total assets under management (AUM) spiked 88% in the twelve months ended November 30, 2013 to $47 billion from $25 billion a year ago. 86% of this growth was concentrated in just eight funds which ended the Period each with more than $1 billion in AUM.

Here is full report: LS Opportunity Fund 2013.

And, David's profile from August: LS Opportunity Fund.

STB65

If I got the message correctly (somewhat <50% likelihood this time of night), their AUM is still < $1B, so they reside in the white zone on the graph. Therefore, they deserve your money.

The basic question (for which I hope for some convincing answers): Is this the market in which L/S funds should make me money? The MFO profile is supportive of this fund (although they were doing relatively poorly in the up market), but they are a transaction fee fund at TDA, so one pays to average in.

David_Snowball

Reply to @STB65: An intriguing graph/dataset and an intriguing question.

The Gold standard in long/short investing is BPLEX and they've long claimed that their niche (small cap long/short - they are all cap but few other l/s funds venture into these smaller market caps) is distinctive and profitable.

Three notes:

LSOFX, at $90 million, is a much better than the average l/s fund with 12% in micro- and small cap stocks. The average l/s fund has about 10% in micro- to small. The largest distinction is in micro: 3.8% for LSOFX, 1.3% for the group. Last summer, LS Advisors reported a strategy capacity of $2 billion with a soft-close at $1 billion to preserve flexibility.

BPLEX, at $810 million but closed at a much smaller size, is much better than LSOFX and much, much better than the average l/s fund (total return since LSOFX's inception is 30.6% for LS, 42% for BPLEX in the same period, 15% for the herd). It holds 33% micro- to small cap (against the group average 10%) and 21% in micro (against barely 1%).

ARLSX, at $220 million, has since inception outperformed both with no micro-cap exposure and slightly below-average small cap exposure. They believe that their strategy capacity is well over a billion - perhaps $1.5, perhaps $2 depending on market conditions.

The decision to close BPLEX at around $500 million seems to validate two conclusions: they are unique opportunities (poor analyst coverage, inefficient pricing) in the small cap arena and you need to be small to benefit from them.

For what that's worth,

David