There is an article in Pension Partners that examined trends and performance in Long/Short strategies over the past several decades and concludes that L/S strategies are a thing of the past. I've wondered that myself after viewing MFLDX's performance lately. I've cut and pasted the author's conclusions. If you are interested in reading the entire article, follow the link below.
http://pensionpartners.com/blog/?p=439Author's conclusions:
1) The alpha-generating long/short equity strategy of the 1990’s and early 2000’s appears to be a thing of the past.
2) This is likely a function of increased competition in the space and an increase in correlation and lack of differentiation among individual equity securities.
3) Over time, the long/short strategy has essentially morphed into a lower beta, long-only product that has actually delivered negative alpha in recent years and shown an inability to protect capital during market declines.
4) While widely considered an “alternative” strategy because of the short side, investors should be questioning this label as long/short funds are behaving more and more like traditional equity investments. With a rolling correlation of over .90, it is hard to argue that they are providing any “alternative” other than a lower beta version of the S&P 500.
5) The increase in correlation to the S&P 500 over the years is likely due to herding and career risk as long/short managers appear unwilling to incur the risk of not participating in an up market. The lack of volatility and historic advance over the past two years has only accentuated this issue, with the now widespread belief that the only way to perform is with higher exposure to the market.
6) While many investors appear to be happy paying 2 and 20 for lower beta exposure, this would appear to be irrational behavior considering the relative ease at which one could replicate such an exposure at a reduced cost.
7) One such replication, consisting of a 50/50 portfolio of Utilities and Staples, has widely outperformed the long/short strategy in recent years with equivalent risk and a lower correlation to the market. While not nearly as exciting as a long/short fund with a story for each individual stock in their portfolio, this would appear to be a better option for many investors if what they seek is simply lower beta.
This analysis represents average performance and some might argue that there are still many long/short funds that have generated positive alpha over the years. I would agree that this is certainly true but would question the ability of most investors to pick such funds. Also, given the poor performance of long/short equity fund of funds in recent years, it does not appear that even professional investors have been successful in separating the wheat from the chaff.
After a 200+% gain for the S&P 500 from the March 2009 low, many long/short equity managers have naturally benefited with sizable gains. Before assigning credit to these managers for any “stock-picking” prowess, I would encourage investors to compare their results with a simple ETF portfolio of Utilities and Staples (the “Utilities/Staples Test”). The results may surprise you.
Happy investing,
Mike_E
Comments
General article, but quality nonetheless. Always good to be able to hit the refresh button on the knowledge base. Thanks for posting.