Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: Long/short funds are often subsumed into the hedged equity category. That’s a serious taxonomic goof. In reality, there may be very little hedge value in such portfolios. We re-learned learned this lesson in the recent selloff when the S&P Volatility Index (VIX) nearly doubled overnight Regards, Ted http://wealthmanagement.com/print/etfs/longshort-doesn-t-mean-hedged
1.What good are they? 2. What is the benefit derived (vs. sticking with a "long-only" fund)? 3. All things being equal, isn't a (typical) long-only fund, a more straightforward, less complex fund to manage -- with a long-only fund, the manager only needs to be right about his/her longs. In a long-short fund, if either your longs OR your shorts don't deliver on-balance, investors are looking for disappointment.) 4. How many really good "shorting" investors are managing public/retail funds? 5. What is the raison d'etre for a long-short fund in a retail investor's portfolio, which doesn't serve as a hedge?
With a few exceptions, these long-short products strike me as being "sold" (to investors) rather than bought. -- A characteristic I see of most alternative-strategy funds.
I am not sure who thought that. I think it is M* who confuses the issue by summarily categorizing most of what it does not understand as long/short as long as it sees some short in funds portfolio.
Let's take FVALX for instance. It used to be Large Value. IT is now Long / Short. The manager shorts S&P as a hedge during bad markets. It is truly a hedge. And on its fund page, there is not even an indication of FVALX being short anything.
Take HSGFX. It is NEVER net short. It is supposed to hedge. It used to be Long / Short. Now it is Market Neutral.
I have been waiting for M* to put CGMFX and FPACX in Long/Short category forever now. They will do it one of these days for heck of it. Sorry, not for heck of it. I think M* always has some agenda.
Bottom line, we are smart people and we don't "subsume" anything. This is problem created by investment management community it is trying to solve itself and someone now can publish article to fulfill his quota. Fantastic. Make a statement like it is truth, and then address it.
VF said, "Take HSGFX. It is NEVER net short. It is supposed to hedge. It used to be Long / Short. Now it is Market Neutral."
I'll note that this fund has slipped back into negative territory for the year. It had its day in the sun. Was above water for a couple days.
Hussman always made a big point of not shorting. Yet, when a fund normally goes up when stocks fall and normally goes down when stocks rise (as this one does), than what on earth to call it if not "short"?
A broad answer to @Edmund 's questions is that Long/Short funds are somewhat unconstrained funds, in that they remove (or lessen) the constraint on being long only. Just as with unconstrained bond funds, about which I made the same comment in another thread, removing constraints is a double edged sword. If a manager is skilled in the larger pool of investment choices, great. But few are.
See Crabbe Huson Special (1990s). (Link is to google search; Baron's article). Manager was then allowed to go short. M* quote: "This is a dismally failed experiment in shorting ... He's just not demonstrated that it's one of his strengths."
More generally, see this paper by Vanguard, discussing long/short funds from the perspective of perturbations from market indexes (what you'd expect from an index/quant house). Essentially, selecting some stocks (overweighting) is by definition a bet against the rest of the stocks in the market (underweighting). This is a perspective that holds regardless of whether shorting is allowed. What a long-only constraint does is limit the degree of underweighting (to a zero position, obviously)
Viewed from that perspective, shorting makes sense as an extension of an existing strategy, not something new. But it comes with the qualification, as noted in the paper (p. 16), that shorting has other quirks that make going long and short not as symmetric as one would like. One obvious difference is the risk of unlimited loss (vs. 100% for long positions). Another is that securities may not always be available to short. A third, which may not be in this paper, is that the execution costs for going short are higher than for going long.
All of these factors make managing short positions different from managing long positions. I don't think the difficulty in long/short funds is so much a matter of issue selection as it is dealing with the different nature of short positions, and fitting that into an overall strategy - that's the first part (but only the first part) of Edmund's question #3.
Well there you go again Seems lots of people like to say that Fund A or Fund B is in the wrong category, so M* must be stupid, or M*'s misapplied its own methodology, or ...
May I respectfully suggest that people look at M*'s methodology for classifying long/short funds and market neutral funds. How do you feel these could be improved, or if you feel they should be thrown out, could you suggest different rules or even different categories that would reflect a better understanding of how these funds work? If it helps, here's a guide to all of M*'s alternative strategy categories.
Regarding HSGFX. It is indeed never net short. Which explains why it will never be considered a bear fund. But that doesn't preclude it from making extensive use of shorts, so long as the result is not more short than long.
As M* describes this fund in its Long/Short methodology paper, it makes extensive use of shorts to reduce or remove market risk. But those are synthetic shorts. It seems to be taking the market out of the equation by going long individual securities and shorting the entire market (net zero equity exposure). If it's made better selections than the market as a whole, it will go up in value else down, independent of market moves.
The latest fund report says that the fund is using these synthetic shorts (not in those words) to fully hedge the market. My guess is that may explain why the fund moved from Long/Short to market neutral. It may have gone from hedging some market risk to hedging virtually all market risk. M*'s methodology for market neutral requires these funds to have equity beta less than 0.3 in magnitude.
Vanguard appears to subsume equity market neutral funds (ones that balance longs and shorts) into long/short. Its paper regards them as just a subcategory of long/short where their net equity exposure is zero. M* in contrast seems to focus on market exposure level as the primary differentiator rather than a fund's strategy. Neither Vanguard nor M* does what that the original paper criticizes - calling long/short funds equity hedged funds. Vanguard even goes out of its way to talk mostly about long/short funds that are 100% net long.
The problem is not about not looking at M* methodology. The problem is treating M* like God. Like Goldman Sachs, M* seems to be the only game in town in its area. Morgan Stanley is kicking dust like Lipper is.
M* for some reason is unimpeachable. Allegedly they have never screwed up. EVER! And common sense is not common. We need M* to tell us what Long/Short is?
Fund prospectus says it will buy stocks it thinks will go up, and short stocks it thinks will go down is Long/Short.
Fund that says it will do L/S with equal Long to Short weighting is Market Neutral.
Fund that says it will short using part of its portfolio upto all of its portfolio if it believes market conditions warrant it, is Hedged.
Fund that says it will do WTF it wants using all of the above is Multi Alternative.
WTF did I decide to get educated? I should have had a Freakin'Star website with an Effing star rating...
The problem is not about not looking at M* methodology. The problem is treating M* like God.
The fault dear Brutus, is not in our stars, but in ourselves? With so many people here taking pokes at M*, it doesn't seem like God gets much respect anymore.
As Warner Wolf would say, let's go to the videotape...
I think it is M* who confuses the issue by summarily categorizing most of what it does not understand as long/short as long as it sees some short in funds portfolio.
That sounds like a criticism of M*'s methodology - that it is misclassifying (methodolgy) due to lack of understanding.
What people give a pass to are other sites. Did anyone, anyone wonder about a single figure in the original article?
It talks about "38 products – mutual funds and exchange-traded – readily identifiable as long/short strategies".
There are at least 60 distinct pure equity funds that call themselves Long/Short (I'm excluding debt, real estate, and commodity funds.) To me, these all seem "readily identifiable". But let's treat the number 38 as gospel?
It uses performance figures over a period of a single month. Anybody else have a problem with that?
BTW, the four long/short funds it names are also classified as long/short by M*. So it's unclear whose classifications it is complaining about. It seems to have set up a straw man.
Fund prospectus says it will buy stocks it thinks will go up, and short stocks it thinks will go down is Long/Short.
Fund that says it will do L/S with equal Long to Short weighting is Market Neutral.
Fund that says it will short using part of its portfolio upto all of its portfolio if it believes market conditions warrant it, is Hedged.
Fund that says it will do WTF it wants using all of the above is Multi Alternative.
You seem to prefer to look at what a fund says, not what it does. M* used to do that, but realized decades ago that this was unreliable. Here's a 1999 academic paper that talks about misclassifications based on prospectus. It starts (on p. 2) by quoting M*'s old practice of relying on what the prospectus says. It then goes on to say that it found 50% of funds are misclassified this way. And that was back in the 1990s, when funds weren't nearly as complex.
What's your classification of HSGFX?
Hussman writes that the fund is never net short. Though that's not stated in the prospectus, the prospectus does say that " the most defensive position expected by the Fund will be a 'fully hedged' position in which the notional values of long and short exposures are of equal size."
That sounds like your Hedged fund. But the fund is also allowed up to 150% market exposure - hardly a hedging strategy by my definition or by yours. "The Fund will be fully invested or leveraged [under certain conditions] ..." and "the maximum exposure of the Fund to stocks ... is not expected to exceed 150% of its net assets."
However, that's just what the prospectus says. In reality the net stock exposure (inception through 2010) has hovered around 20%. (M* premium data) And since 2010, its beta relative to the market (S&P 500) has been negative, as low (large) as -0.53% (M* analyst report).
So there's what a prospectus says, and what a fund really does. Prospectus allows leveraging, while fund's market exposure never exceeds 20% or so. Prospectus bans negative market exposure, while fund acts like it's 50% short the market.
That does seem to suggest that funds, or at least this fund, can be misclassified if one only reads the prospectus. It pays to read at least the portfolio reports as well.
Let's not look at M*. Let's each decide for ourselves. Certain job descriptions should not exist.
I'm not taking dig at M*. I reserve to call bulls*** as much as anyone else.
My classification of HSGFX is hedged. How can ANYONE's classification be anything else? He clearly says how, if at all he is hedged. So he is wrong for being "foolly hedged". Doesn't change how he manages the fund. There is no need to make a fund dance around stupid stylebox or call it L/S one day Market Neutral the next. For all we know some day it will be called Tactical Allocation. Let managers tell you what their fund is. Let investors judge for themselves.
Legg Mason Value(?!?!?!?!) Trust, my a**.
I have been as guilty as anyone else for diversifying to the style box. I have also asked questions on MFO such as "I don't have enough mid cap value, can you suggest a fund". I stopped doing that. Better late than never.
Comments
1.What good are they?
2. What is the benefit derived (vs. sticking with a "long-only" fund)?
3. All things being equal, isn't a (typical) long-only fund, a more straightforward, less complex fund to manage -- with a long-only fund, the manager only needs to be right about his/her longs. In a long-short fund, if either your longs OR your shorts don't deliver on-balance, investors are looking for disappointment.)
4. How many really good "shorting" investors are managing public/retail funds?
5. What is the raison d'etre for a long-short fund in a retail investor's portfolio, which doesn't serve as a hedge?
With a few exceptions, these long-short products strike me as being "sold" (to investors) rather than bought. -- A characteristic I see of most alternative-strategy funds.
Let's take FVALX for instance. It used to be Large Value. IT is now Long / Short. The manager shorts S&P as a hedge during bad markets. It is truly a hedge. And on its fund page, there is not even an indication of FVALX being short anything.
Take HSGFX. It is NEVER net short. It is supposed to hedge. It used to be Long / Short. Now it is Market Neutral.
I have been waiting for M* to put CGMFX and FPACX in Long/Short category forever now. They will do it one of these days for heck of it. Sorry, not for heck of it. I think M* always has some agenda.
Bottom line, we are smart people and we don't "subsume" anything. This is problem created by investment management community it is trying to solve itself and someone now can publish article to fulfill his quota. Fantastic. Make a statement like it is truth, and then address it.
Eating sausage causes cancer. Stop eating sausage.
I'll note that this fund has slipped back into negative territory for the year. It had its day in the sun. Was above water for a couple days.
Hussman always made a big point of not shorting. Yet, when a fund normally goes up when stocks fall and normally goes down when stocks rise (as this one does), than what on earth to call it if not "short"?
See Crabbe Huson Special (1990s). (Link is to google search; Baron's article). Manager was then allowed to go short. M* quote: "This is a dismally failed experiment in shorting ... He's just not demonstrated that it's one of his strengths."
More generally, see this paper by Vanguard, discussing long/short funds from the perspective of perturbations from market indexes (what you'd expect from an index/quant house). Essentially, selecting some stocks (overweighting) is by definition a bet against the rest of the stocks in the market (underweighting). This is a perspective that holds regardless of whether shorting is allowed. What a long-only constraint does is limit the degree of underweighting (to a zero position, obviously)
Viewed from that perspective, shorting makes sense as an extension of an existing strategy, not something new. But it comes with the qualification, as noted in the paper (p. 16), that shorting has other quirks that make going long and short not as symmetric as one would like. One obvious difference is the risk of unlimited loss (vs. 100% for long positions). Another is that securities may not always be available to short. A third, which may not be in this paper, is that the execution costs for going short are higher than for going long.
All of these factors make managing short positions different from managing long positions. I don't think the difficulty in long/short funds is so much a matter of issue selection as it is dealing with the different nature of short positions, and fitting that into an overall strategy - that's the first part (but only the first part) of Edmund's question #3.
Well there you go again
May I respectfully suggest that people look at M*'s methodology for classifying long/short funds and market neutral funds. How do you feel these could be improved, or if you feel they should be thrown out, could you suggest different rules or even different categories that would reflect a better understanding of how these funds work? If it helps, here's a guide to all of M*'s alternative strategy categories.
Regarding HSGFX. It is indeed never net short. Which explains why it will never be considered a bear fund. But that doesn't preclude it from making extensive use of shorts, so long as the result is not more short than long.
As M* describes this fund in its Long/Short methodology paper, it makes extensive use of shorts to reduce or remove market risk. But those are synthetic shorts. It seems to be taking the market out of the equation by going long individual securities and shorting the entire market (net zero equity exposure). If it's made better selections than the market as a whole, it will go up in value else down, independent of market moves.
The latest fund report says that the fund is using these synthetic shorts (not in those words) to fully hedge the market. My guess is that may explain why the fund moved from Long/Short to market neutral. It may have gone from hedging some market risk to hedging virtually all market risk. M*'s methodology for market neutral requires these funds to have equity beta less than 0.3 in magnitude.
Vanguard appears to subsume equity market neutral funds (ones that balance longs and shorts) into long/short. Its paper regards them as just a subcategory of long/short where their net equity exposure is zero. M* in contrast seems to focus on market exposure level as the primary differentiator rather than a fund's strategy. Neither Vanguard nor M* does what that the original paper criticizes - calling long/short funds equity hedged funds. Vanguard even goes out of its way to talk mostly about long/short funds that are 100% net long.
M* for some reason is unimpeachable. Allegedly they have never screwed up. EVER! And common sense is not common. We need M* to tell us what Long/Short is?
Fund prospectus says it will buy stocks it thinks will go up, and short stocks it thinks will go down is Long/Short.
Fund that says it will do L/S with equal Long to Short weighting is Market Neutral.
Fund that says it will short using part of its portfolio upto all of its portfolio if it believes market conditions warrant it, is Hedged.
Fund that says it will do WTF it wants using all of the above is Multi Alternative.
WTF did I decide to get educated? I should have had a Freakin'Star website with an Effing star rating...
As Warner Wolf would say, let's go to the videotape... That sounds like a criticism of M*'s methodology - that it is misclassifying (methodolgy) due to lack of understanding.
What people give a pass to are other sites. Did anyone, anyone wonder about a single figure in the original article?
It talks about "38 products – mutual funds and exchange-traded – readily identifiable as long/short strategies".
There are at least 60 distinct pure equity funds that call themselves Long/Short (I'm excluding debt, real estate, and commodity funds.) To me, these all seem "readily identifiable". But let's treat the number 38 as gospel?
It uses performance figures over a period of a single month. Anybody else have a problem with that?
BTW, the four long/short funds it names are also classified as long/short by M*. So it's unclear whose classifications it is complaining about. It seems to have set up a straw man. You seem to prefer to look at what a fund says, not what it does. M* used to do that, but realized decades ago that this was unreliable. Here's a 1999 academic paper that talks about misclassifications based on prospectus. It starts (on p. 2) by quoting M*'s old practice of relying on what the prospectus says. It then goes on to say that it found 50% of funds are misclassified this way. And that was back in the 1990s, when funds weren't nearly as complex.
What's your classification of HSGFX?
Hussman writes that the fund is never net short. Though that's not stated in the prospectus, the prospectus does say that " the most defensive position expected by the Fund will be a 'fully hedged' position in which the notional values of long and short exposures are of equal size."
That sounds like your Hedged fund. But the fund is also allowed up to 150% market exposure - hardly a hedging strategy by my definition or by yours. "The Fund will be fully invested or leveraged [under certain conditions] ..." and "the maximum exposure of the Fund to stocks ... is not expected to exceed 150% of its net assets."
However, that's just what the prospectus says. In reality the net stock exposure (inception through 2010) has hovered around 20%. (M* premium data) And since 2010, its beta relative to the market (S&P 500) has been negative, as low (large) as -0.53% (M* analyst report).
So there's what a prospectus says, and what a fund really does. Prospectus allows leveraging, while fund's market exposure never exceeds 20% or so. Prospectus bans negative market exposure, while fund acts like it's 50% short the market.
That does seem to suggest that funds, or at least this fund, can be misclassified if one only reads the prospectus. It pays to read at least the portfolio reports as well.
I'm not taking dig at M*. I reserve to call bulls*** as much as anyone else.
My classification of HSGFX is hedged. How can ANYONE's classification be anything else? He clearly says how, if at all he is hedged. So he is wrong for being "foolly hedged". Doesn't change how he manages the fund. There is no need to make a fund dance around stupid stylebox or call it L/S one day Market Neutral the next. For all we know some day it will be called Tactical Allocation. Let managers tell you what their fund is. Let investors judge for themselves.
Legg Mason Value(?!?!?!?!) Trust, my a**.
I have been as guilty as anyone else for diversifying to the style box. I have also asked questions on MFO such as "I don't have enough mid cap value, can you suggest a fund". I stopped doing that. Better late than never.
Though asking whether there was value (in either the style sense or the investing sense) is also a good question.