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The problem is that for mutual fund/ETF investors successful ones are so few and finding these are are after the fact. A lot of promising ones turn out to be a dud over time.
There was a rush to diversify portfolios into these after 2008 and I personally believe most of them will fail to deliver and disappoint. Wall street is good in creating new products after each crash episode. Without a rush of these products there would not be assets held in products high enough profit margin for wall street.
The article does not quite back up theory with facts. I looked up the three funds mentioned:
AQMIX: Expense ratio 1.25% per year; 2-year record is -3.56%.
JMNAX: Front-end load 5.25%, expense ratio 1.48%. 5-year record is 0.72%.
FQHIX: Expense ratio 1.16%, 3-year record is 2.66%.
If, as the article says of rich investors, “their portfolio decisions typically are better-informed and they have sufficient diversification to hang tough in rough markets,” then the article needs to give way better examples of some of that superior information and superior diversification.
Anybody have ideas about which funds (or other investments) would fill this role?
Reply to @Archaic: Marketfield MFLDX is often mentioned as a good long-short fund. (Note their impending transfer to New York Life / Mainstay.) There were also several other long-short funds that were profiled by MFO during the last few months. Look under the Commentaries section and read through June and July 2012.
I think PIMCO / Rob Arnott's "All-Asset" funds are a good way to access alternative strategies in a balanced manner. PAUIX / PAUDX for the leveraged, more expensive version and PAAIX / PASDX for the unleveraged, cheaper version.
Reply to @Archaic: I've come to the conclusion that I believe managed futures works well as a hedge fund strategy but mutual funds are hampered by the mutual fund structure and are not flexible enough to pull off the strategy in today's markets. Look at the first managed futures MF, Rydex Managed Futures - which is very basic and whose positions are updated once a month. The fund needs a consistent trend, or else it gets continually whipsawed. It did well in 2008 (up 8%) with a very consistent trend (unfortunately, that was consistently DOWN), but ever since then the fund has seemed more or less broken.
What I would call the "second generation" of the managed futures funds (such as the AQR fund) have done somewhat better but are still just not faring well. Still, there are managed futures hedge funds that are faring reasonably well at the same time. I don't think it's the strategy at all, I think it needs a level of nimbleness in markets like this that I don't think can be had within a mutual fund structure.
Maybe a re-thought managed futures concept where a small managed futures portion of the portfolio acts as a volatility buffer over time to a largely long-only stock portfolio (although Natixis ASG Growth Markets is not exactly helping to prove that concept) or maybe a managed futures fund that's largely long-only but the long-only portfolio could go to cash if things got particularly bad and the short portfolio would be limited to 25% of the fund (for example), but couldn't go to cash, making for a fund that would be long-biased most of the time?
I do think there's a place for a re-thought managed futures concept for mutual funds though - maybe a long-or-flat managed futures fund instead of long/short?
Anyways, as for long/short, I think many funds have been too strict with the definition, but the more "multi-speed" funds, such as Marketfield and a few other new offerings, which can be a lot more flexible at dialing up/down risk, are very compelling. The Robeco long/short funds are another example, although only one remains open.
I think it's not that these strategies don't work - I think many funds of the "Hedge Funds for the Masses" push were either hampered by the mutual fund structure or just not very good.
Reply to @Archaic: Happy to help. The other fund I'd suggest - and which David will profile next month - is Whitebox Tactical Opportunities, a long/short aggressive allocation fund whose very detailed discussion of the philosophies behind its hedging strategy can be found towards the end of the 2Q letter.
The entire last page has a lengthy discussion of their approach.
This fund does not have a long history, although from all accounts it would appear to be a lite version of one of their hedge funds. The long/short aspect is summarized: "Our fund is not currently “market neutral.” We have a strong “long-bias”. At other times we may have a strong short bias. Our returns will reflect at least a portion of day to day, normal market volatility. Our goal is to outperform not by delivering smooth returns all the time. Our goal is to outperform by doing two things. (1) Avoiding catastrophic capital losses that can derail an investment program for years, or forever. (2) Being invested in areas of exceptional opportunity wherever in securities markets those opportunities arise. And - "We hedge against disaster, against tornadoes, not blustery days." There is much more in the letter, but the general philosophy would suggest a fund that is likely going to be long-biased to some degree much of the time, but has the capability to go strongly short if the situation warrants.
It's an interesting little fund from a well-regarded hedge fund firm and I'm eager to see David's profile of it soon.
Edited to add:
It's overbought at this point, but I'll also throw in Brookfield Infrastructure (BIP) as an alternative suggestion, as it's effectively a company operating private infrastructure assets globally. It's done quite well, but it's done quite well while often seeming to - to quote a U2 song - to move in mysterious ways. It's definitely not highly correlated to markets, or at least has not been for quite a while.
That would be not a way to invest like the 1% in terms of an alternative strategy like "long-short", but an alternative asset class in terms of a company that can opportunistically buy private real assets. It does yield 4.25% as well, but one warning is that it is an MLP and does result in a K-1 form at tax time.
Comments
1) Long-short equity
2) Managed futures
3) Market neutral
The problem is that for mutual fund/ETF investors successful ones are so few and finding these are are after the fact. A lot of promising ones turn out to be a dud over time.
There was a rush to diversify portfolios into these after 2008 and I personally believe most of them will fail to deliver and disappoint. Wall street is good in creating new products after each crash episode. Without a rush of these products there would not be assets held in products high enough profit margin for wall street.
AQMIX: Expense ratio 1.25% per year; 2-year record is -3.56%.
JMNAX: Front-end load 5.25%, expense ratio 1.48%. 5-year record is 0.72%.
FQHIX: Expense ratio 1.16%, 3-year record is 2.66%.
If, as the article says of rich investors, “their portfolio decisions typically are better-informed and they have sufficient diversification to hang tough in rough markets,” then the article needs to give way better examples of some of that superior information and superior diversification.
Anybody have ideas about which funds (or other investments) would fill this role?
I think PIMCO / Rob Arnott's "All-Asset" funds are a good way to access alternative strategies in a balanced manner. PAUIX / PAUDX for the leveraged, more expensive version and PAAIX / PASDX for the unleveraged, cheaper version.
What I would call the "second generation" of the managed futures funds (such as the AQR fund) have done somewhat better but are still just not faring well. Still, there are managed futures hedge funds that are faring reasonably well at the same time. I don't think it's the strategy at all, I think it needs a level of nimbleness in markets like this that I don't think can be had within a mutual fund structure.
Maybe a re-thought managed futures concept where a small managed futures portion of the portfolio acts as a volatility buffer over time to a largely long-only stock portfolio (although Natixis ASG Growth Markets is not exactly helping to prove that concept) or maybe a managed futures fund that's largely long-only but the long-only portfolio could go to cash if things got particularly bad and the short portfolio would be limited to 25% of the fund (for example), but couldn't go to cash, making for a fund that would be long-biased most of the time?
I do think there's a place for a re-thought managed futures concept for mutual funds though - maybe a long-or-flat managed futures fund instead of long/short?
Anyways, as for long/short, I think many funds have been too strict with the definition, but the more "multi-speed" funds, such as Marketfield and a few other new offerings, which can be a lot more flexible at dialing up/down risk, are very compelling. The Robeco long/short funds are another example, although only one remains open.
I think it's not that these strategies don't work - I think many funds of the "Hedge Funds for the Masses" push were either hampered by the mutual fund structure or just not very good.
Archaic
http://www.whiteboxmutualfunds.com/content/assets/docs/newsletters/Whitebox-Tactical-Op-Newsletter_Q2_2012.pdf
The entire last page has a lengthy discussion of their approach.
This fund does not have a long history, although from all accounts it would appear to be a lite version of one of their hedge funds. The long/short aspect is summarized: "Our fund is not currently “market neutral.” We have a strong “long-bias”. At
other times we may have a strong short bias. Our returns will reflect at least a
portion of day to day, normal market volatility. Our goal is to outperform not by
delivering smooth returns all the time. Our goal is to outperform by doing two
things. (1) Avoiding catastrophic capital losses that can derail an investment
program for years, or forever. (2) Being invested in areas of exceptional
opportunity wherever in securities markets those opportunities arise. And - "We
hedge against disaster, against tornadoes, not blustery days." There is much more in the letter, but the general philosophy would suggest a fund that is likely going to be long-biased to some degree much of the time, but has the capability to go strongly short if the situation warrants.
It's an interesting little fund from a well-regarded hedge fund firm and I'm eager to see David's profile of it soon.
Edited to add:
It's overbought at this point, but I'll also throw in Brookfield Infrastructure (BIP) as an alternative suggestion, as it's effectively a company operating private infrastructure assets globally. It's done quite well, but it's done quite well while often seeming to - to quote a U2 song - to move in mysterious ways. It's definitely not highly correlated to markets, or at least has not been for quite a while.
That would be not a way to invest like the 1% in terms of an alternative strategy like "long-short", but an alternative asset class in terms of a company that can opportunistically buy private real assets. It does yield 4.25% as well, but one warning is that it is an MLP and does result in a K-1 form at tax time.