FYI: Copy & Paste Jack Rivkin WSJ 4/16/14
Regards,
Ted
Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Jack Rivkin is chief investment officer of Altegris in La Jolla, Calif.
As we enter a more volatile market, it's time for clients to start thinking about preserving what money they made in 2013. However, it's also important that advisers help their clients remain participants in the market while minimizing risk. Using long-short equity mutual funds, which emphasize risk management over market timing, allows clients to do just that.
In a long-short strategy, fund managers hold attractive investments, which they anticipate will increase in value. At the same time the managers short overvalued stocks by borrowing and immediately selling shares which they anticipate they'll be able to buy back later at a lower price. When the price of the stock drops, the manager buys and then sells the borrowed shares back to their broker. The gain is in difference between what the manager made off the initial sale of the stock and lower price it was bought back for.
When done skillfully, the strategy allows clients to maintain exposure to stocks while reducing their exposure to volatility in the market as a whole. They capture less upside when things are going well, but they also capture less of the downside in periods of volatility.
Until recently, long-short strategies were available primarily through hedge funds. However, because hedge funds are illiquid and have steep minimum investment requirements, they tend to be accessible to high-net-worth clients only. The introduction of long-short equity and long-short fixed income mutual funds has changed that.
These are vehicles designed to give regular investors access to long-short trading strategies. The minimum investment for these products is consistent with a typical mutual fund, meaning they can be used with a much broader range of clients. Not only are the funds subject to SEC compliance, the structures are designed to provide daily pricing and daily liquidity, a quality that is critical. No investor has forgotten the 2008 crash, a time when many investors wanted to sell mutual fund positions quickly and weren't able to. So the ability with long-short funds to liquidate a position at any time should help a lot of clients sleep better at night.
Despite these advantages, I think that long-short mutual funds are somewhat misunderstood. Investors and advisers hear that these vehicles mimic the behavior of hedge funds. People think of hedge funds as unregulated and dangerous and dismiss these products as dangerous as well. Long-short mutual funds are criticized for being risky when, in fact, they're designed specifically to mitigate risk.
When proposing a long-short strategy to a client, show them the performance data that reveals that the funds lost a fraction of what the overall market lost in 2008. The data will also show how quickly these funds recovered compared with other asset classes over the past five years. Aside from 2013, they've outperformed the market in each year since the crash. Over the long run, their average returns are consistent with the rest of the market and those returns come without nearly as much risk.
Asking clients to switch gears and consider strategies that cap potential upside after the year we just had is a hard sell, but it's a conversation you must have. Our message to clients should be that capital preservation does not mean pulling all of your money off the table. It's simply about finding better ways to hedge against risk.
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Comments
Yeah, I noticed too.
But L/S doing better than multi-sector US bonds this past year
And WBMIX, MFLDX, ALSIX all within 5% of each other, looks like...since ALSIX inception.
Do think that higher fees in this class remains a headwind to success.
But, I like it and think Mr. Rivkin makes right assessment.
Here's M* performance comparison: