Altegies: Forget Active Long-Only Strategies, Go Long/Short

Ted

FYI: A new whitepaper from Altegris, Long/Short Equity: Choosing Alpha over Beta, makes the case for long/short equity investing as a viable alternative to actively managed, long-only strategies. The paper’s authors, Ryan Hart, CFA, CAIA, Portfolio Manager and Co-Director of Research & Investments, and Lara Magnusen, CAIA, Director of Investment Products, argue that beta exposure can be accessed through low-cost, passive indexing; that long-only strategies have too much beta; and that long/short equity strategies have and should continue to outperform long-only strategies. Here are the key points they make.
Regards,
Ted
http://dailyalts.com/altegris-forget-active-long-strategies-go-longshort/

VintageFreak

Every so often articles like these prompt us to question our understanding. There are some statements in that article that are facts. The problem is when someone takes two facts and draws a conclusion, is it a 3rd fact?

I thought I had settled on whether I needed L/S funds in my portfolio. I did convince myself I did, knowing full well each L/S fund is not the same, and that I would not rely on M* classifications such as Multialternative, L/S, Market Neutral (the only thing I'm absolutely positive I will never do).

Most active managers suck. One is because of co-relation to an index that is also long. That's just obvious. My ANALysis then kicks in because I unfortunately have a low opinion of investment managers ethics and acumen, and for the most part the kind of people this profession attracts (I may have mentioned Information Technology is the other such profession) to conclude this situation will never change. I can believe 80% of active managers are bad. Very good reason to invest in Index funds if you are long instead of active funds.

The problem starts with the suggestion a long/short manager can generate "double alpha". What about "double whammy". Can we apply L/S approach to indexing. I doubt it, but someone can educate me. So then, we are talking about active management when we talk L/S. These L/S active managers are now a subset of those 20% of active managers in total who may we worth it. I'll suggest a number of 2% of all managers who will prove their worth in L/S investing.

A bad active manager who cannot pick a good long stock, shouldn't also be able to pick a good short stock. Just like some managers who made their name in the bull market being long, some long/short managers who happen to start their fund at the right time, and were largely short will claim expertise when all they did was ride on the coattails of the market by investing in the SAME riskiest stocks, but just riding them in the opposite direction.

I need to rethink this. Maybe an alternative fund in IRA is good for a slice of what would be the bond side of the portfolio. Maybe taxable portfolio does not need L/S funds.

Ted

@VintageFreak: Did you ever think, maybe you don't need a L/S Fund in any account.
Rebgards,
Ted

Tony

Can we apply the L/S approach to indexing? I think so, but by using a Long/Inverse approach. One can use technical and/or fundamental analysis to decide when to switch between ETF pairs varying from DIA/DOG, SPY/SH, IJH/MYY to IYR/REK, GLD/DGZ, USO/DNO, etc.

JohnChisum

"I need to rethink this. Maybe an alternative fund in IRA is good for a slice of what would be the bond side of the portfolio. Maybe taxable portfolio does not need L/S funds."

I think that would be prudent. The turnover rates on L/S funds must be higher than usual.

I hold ACDJX in the portfolio. It has beaten the S&P so far by one percentage point. I didn't buy it for the L/S factor but for what the fund what buying. Tech. Future stocks I call them.

I like a little spice in the portfolio.

MikeM

I've slowly come to the conclusion that Ted and a few others are right. These funds add nothing to a diversified portfolio. They in general, do not out-perform a decent balanced fund. If you have to be right twice, in an up market and in a down market, your odds are very slim the manager can pull it off. If you look, most of these funds are only decent in one market or the another. I was sold on RGHVX when it looked great over the last couple years. But it had no protection in a down market based on the latest slow down.

A bond substitute? Pick a conservative balanced fund with 15-30% stocks. A little spice to a portfolio? Say you put 10% into one of these funds for spice or protection. In a down-turn they may save you a 10% drop over equities. So your portfolio is down 1% less. Big deal. You will get that back when the market moves up again.

Nope, I'm convinced now these "interesting and intriguing" funds were a marketing ploy feeding off investors fears of the last great recession.

JohnChisum

I don't count on mine to save me in a downturn as it uses the short side as a leverage for higher returns. I'm sure it will make for exciting downdrafts too. I bought it for other reasons.

I do agree, I don't see the true L/S funds being able to turn on a dime to be defensive. No one has that good a crystal ball anyway.

VintageFreak

I don't think it is about whether an alternative fund is required in a portfolio. We need to think beyond M* classification. A lot of funds short. FPACX is one example. Let's not forget CGMFX which used to be everyone's darling. At the turn of the previous decade it got where it did by shorting.

There are certain managers who know WTF they are doing and others who don't. We need to try and get some information on the management. Heavy personal ownership in funds like these should IMO be an absolutely essential requirement. Robeco seems to know what they are doing. Maybe there are others who do too.

I will own FVALX. Regardless of whether M* classifies it as L/S or not. It is silly to reach a random conclusion such as L/S fund is not needed in any portfolio and then simply sell your fund. Equally silly is making the claim L/S fund not needed in any portfolio and still starting a thread related to L/S funds.

JohnChisum

The preface of this link was very favorable to L/S funds so I can understand VF's point.

heezsafe

Isn't the proof supposed to be in the pudding? So far, all I've seen, and all I've found, is the pudding, congealed. That, and the sound that comes with it: the great sucking sound of money.... leaving the funds' accounts as it travels to management (esp. Altegris).

Chinfist

We have been in a 5 year bull market, so long-short funds are not going to perform as well as long only funds in that environment. We will be in a better position to judge them when the market turns south for a sustained time.

kevindow

Once again, I am totally with Ted. To date, I have never been presented with any objective evidence that any investor needs a L/S fund as part of a diversified portfolio.

Of course I have been presented with sales pitches like this one from Altegris, but they lack any objective evidence for their promotion. Please look at the track records of the Altegris funds which have had underwhelming returns but overwhelming expense ratios: ELSIX (actual ER: 3.55%) , FXDIX (ER 2.06%), MCRIX (ER: 2.02%), MFTIX (ER: 1.65%), MULIX (ER: 3.09%). Two of their funds have had decent returns -- RAAIX (ER: 2.05%) and EVOIX (ER: 1.69%) -- but they are not conventional L/S funds.

Clearly L/S is a troubled investment space as there have been very few LT winners to date -- limited to BPLSX and HHCZX -- and far more losers which have only enriched the managers of the funds with their pricey expense ratios.

Kevin

VintageFreak

While wea are discussing alts, take a look at discrepancy in managed futures fund returns. Some that are newer have done very well, others older ones havent. Again, that means nothing about manager skill. We invest to grow our money. If we are goig to discuss active management, then we need to look everywhere. Or lets not wait each others time and just invest in index funds.

Ted

@VintageFreak: Excellent point ! Top Managed Futures Funds from U.S. New & World Report, but boy are they expensive.
Regards,
Ted
http://money.usnews.com/funds/mutual-funds/rankings/managed-futures

M* Managed Futures Fund Returns:
http://news.morningstar.com/fund-category-returns/managed-futures/$FOCA$13.aspx

M* Top Performing Managed Futures Funds 3mo.
http://finance.yahoo.com/funds/lists/?mod_id=mediaquotesmutualfunds&cat=$FOCA$13$$&rcnt=50