conference call, RiverPark Long/Short, Thursday: other questions?

David_Snowball

Dear friends,

We're moderating our second conference call, this one with Mitch Rubin. Last summer we identified a few promising long-short funds, including both RiverPark and Aston/River Road. I'm hopeful of offering folks to chat with Mr. Rubin this month and Mr. Moran in December. While neither fund is flawless, both struck me as having clear, defensible strategies and thoughtful, articulate managers. You might check out the profiles of both.

You're certainly welcome to join in on the call. The registration link is in my November cover essay and I just sent it in a reminder to our main subscriber list (3,067 subscribers, chip tells me, against about 10,000 readers in a month).

I'll work this week on generating four or five decent questions to put to Mr. Rubin. The only question so far seems more about the fund category than about the fund. Roughly: "doesn't the record show that this is a failed strategy, expensive and low-returning?" That's a decent question and I'll ask both long/short managers.

If folks have either observations about the fund or questions they'd like to hear him address, I'd be delighted to hear about it.

Take great care,

David

claimui

Your summer commentaries were very interesting, but they mostly left me with the impression that long/short funds have generally performed quite poorly and it is not clear that the trend will be reversed. Possible exceptions might be the Robeco fund (closed to new investors) and Marketfield (now under Mainstay; no-load version closed to new investors after many warnings here).

That said I do have respect for both RiverPark and River Road (and while we're at it, RiverNorth too, hah) and their profiles are interesting, but given how the long/short category has performed in general, it seems they will need to be truly exceptional to succeed.

I would be curious to know what each of these managers think is the reason why so many long-short funds have failed (and perhaps also what they think is the reason why Robeco and Marketfield have succeeded) and what they think will allow them to be one of the exceptions.

Ted

Dear Claimui: For those who are interested I have linked the the returns of long/short funds from M*. It appears to me that the mutual fund public has become tired of mainstream funds, and are looking for that Utopia Fund as more and more alternative funds come to market. In general as Claimui has commented, long/short funds are expensive and have performed very poorly.
Regards,
Ted
http://news.morningstar.com/fund-category-returns/longshort-equity/$FOCA$LO.aspx

claimui

I think this is a helpful link as well, so you can see long/short performance compared to other categories: http://news.morningstar.com/fund-category-returns/ (also posted by Ted in another thread)

Note that as a group, their returns have trailed even the most conservative of balanced funds. Over a longer term, they have not been able to beat short-term bonds (a point that was made in David's commentaries) or most other asset classes.

scott

Reply to @claimui: My view is that funds like Marketfield and the Robeco funds play a little more loose with the definition of long-short and are able to dial up/down risk in a much more flexible fashion than many long-short funds. Many funds I've looked at in the category emphasize being both long and short and seem inflexible in adjusting based on the environment. Long story short, the more dynamic nature of Marketfield and Robeco have lead to noticeable outperformance vs the category. Both are most likely going to loose more than other funds in the category if another 2008 occurred, but have the potential for considerable outperformance in up years.

Having funds that offer a greater degree of flexibility (and I think flexibility and diversification will become increasingly important after a relatively smooth few years) - whether long/short or across multiple asset classes - and that may offer uncorrelated returns are (for some) a useful choice for part of a larger portfolio. I remain pleased with funds like Ivy Asset and Marketfield. Other people are welcome to invest differently, and that - I think - is one of the joys of investing. There is no one right answer for all people, and I often find other people's views who differ from my own fascinating or at the very least interesting.

As for the category, a number of long-short funds simply aren't very good, some are too esoteric and will not likely attract enough assets even if they do okay (James Alpha Global Real Return, from the former Pimco Commodity RR manager), don't work in a mutual fund structure (I've said previously that I don't think the managed futures category really works in mutual fund form, but there are a number of highly successful managed futures hedge funds, which have far greater flexibility and less restrictions) or simply haven't chosen to be flexible to adjust to the environment they're facing (see Hussman.)

However, more dynamic funds like the Robeco fund and Marketfield and the River Park fund show some promise of a second generation for the category. The Wasatch L/S fund - which has been around for a while - is another good choice.

I don't think the public is looking for a "utopia" fund in the category as I don't think the public has any interest in the category as a whole, and I'd be curious to see the AUM of the category as a whole over the last few years versus AUM of the few standouts (Marketfield, for example.) I'd have to imagine the AUM of the category minus the few standouts is down, probably quite a bit - although flows out of stock funds in general keep continuing week after week after week.

Equity funds had estimated outflows of $8.38 billion for the week, compared to estimated outflows of $1.84 billion in the previous week. Domestic equity funds had estimated outflows of $6.63 billion, while estimated outflows from world equity funds were $1.75 billion.

http://www.ici.org/research/stats/flows/flows_11_21_12

If anything, the general public would seem far more in love with fixed income. 2008 saw some people leave and not come back to the stock market, many seem to have piled into bonds. At some point, bonds will turn and I'll guess that a fair amount of those people who sought safety in bonds after they got out of stocks in 2008 and then will see bonds turn and will not want anything to do with investing at all, and that's unfortunate. It's doubtful that there will ever be a push to offer financial education at the high school level rather than home ec, despite the fact that greater financial knowledge will likely have a number of benefits for both the market and greater economy.

If anything, the time period should be studied as a rather remarkable turn from the usual public chasing the rally - there have been few weeks in the last few years where there haven't been outflows out of stock funds and giant inflows into fixed income. Fidelity now has more AUM in bonds and money markets than stock funds.

Whatever anyone's thoughts on Zerohedge, this chart of stock vs bond inflows from 2000 to now is a rather remarkable visual on money flow.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/09-2/js 5.png

"Question: If interest rates rise, what will typically happen to bond prices? Only 21% of the 2009 FINRA National Financial Capability Study knew that the answer was “They will fall.” The same question to a group of active U.S. military got only a 30% correct response rate. In a 2010 Northwest Mutual survey, only 41% knew the relationship between interest rates and bond prices."

http://www.zerohedge.com/news/investors-nostalgic-logical-markets-boycott-new-centrally-planned-normal

Charles

Reply to @claimui: Good question!

Charles

Reply to @scott: Yes. Currently, it seems, people would rather own a company's debt, than own the company. If I recall, in Ben Graham's classic "The Intelligent Investor," it was not that long ago where it was in fact inappropriate, perhaps even illegal, for a trust to own stocks over bonds, as it was considered a form of speculation, if not gambling.

Charles

Reply to @Ted: How about this: the public has become tired of lack of risk management in mainstream funds, certainly for the core of their portfolios. I'm guessing that they are willing to lose-out on some of the long-term upside to avoid getting slammed by the near-term down-side. Time will tell if these alternatives, which I include risk parity funds like AQRIX, will beat, or at least be comparable to, the mainstreams over the long term. I personally think that it is a reasonable, if not wise, for the public, including us, to expect, demand, and pursue. Don't you?

scott

It's not just asking why hasn't the category done well (it's not as if there's many successful long/short hedge funds - Third Point, Greenlight and many others - calling it a failed strategy, as if it's never been successful, is absurd), but trying to get an understanding of what has broadly caused the broad mutual fund l/s category not to fare well - managerial fault? Taking the long/short definition too strictly and not adjusting in the face of changing market environment (in other words, I'm not going to dial down the short side because I'm a long/short fund and I always have to have distinct l/s sides? The restrictions on mutual funds vs hedge funds?

Here's a big question, and this isn't intended to offend the manager interviewed: why would the big talents want to run a l/s mutual fund when they can get 2 and 20 running a l/s hedge fund? In other words, has the category not fared well as a whole because it's not attracting talent, who are going to hedge funds instead? A number of high-profile mutual fund managers have gone that way in the last year or two (Rao, Iben, Decker, there's most likely others I'm not remembering). I don't know the current status of Heebner's hedge fund (Wayfarer Capital), but maybe that's proven to have gotten more focus than, well, CGM Focus (which now has something like a tenth of the assets it did at its peak.)

This could also be rephrased to the manager interviewed: why run a mutual fund when a hedge fund is potentially much more lucrative? A hedge fund company can offer mutual funds (Whitebox, for example) in order to increase AUM and find new business, but in terms of hedge fund managers leaving entirely to run mutual funds or mutual fund managers leaving to run hedge funds, there's been more of the latter than the former in recent years.