Don’t Lose Your Balance…Funds, part II
by Richard
Following up on yesterday’s post regarding balanced funds…the new kid on the block is the asset class known as long-short funds.
Also known as the poor man’s hedge fund.
I’ll admit to being skeptical as to the ability of fund managers to tame this beast, as most portfolio managers in the traditional fund world have an inherent bias towards the long side of the market.
And who can blame them, knowing that up markets prevail in two out of every three years?
But this hair raising market of the past year has proven the worth of this hybrid vehicle.
The Long and the Short of It
In the year ending July 31, the category was down 4.69%, which represents strong relative performance.
More and more I am inclined to the viewpoint that success is measured in holding losses to the minimum and making it all up in strong upmarket cycles.
If this category is new or unfamiliar to you, go to Morningstar’s funds index page. Tab the “year to date” returns, and scroll down to the alternate asset classes.
There you will find the long-short heading, and see how wide ranging their returns have been. As recently as a year ago, this new category was bundled into the moderate allocation category, which shows how recently they have arrived on the scene.
This is not a static listing. Just in the past month, they have added distinct asset class status for both currency funds and foreign real estate funds, and I now have 36 distinct asset classes I regularly follow. Which is an order of magnitude easier than trying to sort out 20,000 funds available worldwide.
You will recognize many familiar fund families that have trotted out their own long/short products, including Rydex, Schwab, and Laudus (itself wholly owned by Schwab).
130/30 Funds
A variation of long-short funds are known as 130/30 funds, which go long 130% of their cash position using margin leverage, and then offset this exposure with a 30% short position, to arrive at a net 100% long exposure.
This is the essence of hedging. Placing your bets on both the red and the black, knowing that your gains will offset your losses, at least partially, on strong market ticks in either direction.
I expect these funds to enjoy their day in the sun while the market tries to regain its footing, but once we reach capitulation, and the bottom of this sorry cycle, the long-only funds will far outdistance these omni-directional funds.
The Turning Point?
And what indicators should we look for to signal such a major turn?
Probably when public employee pension fund managers embrace the concept as the latest, state of the art iteration to rescue their dismal performance.
Just as they were late to the party for private equity, real estate and commodities, now is no time to spoil their perfect record as a lagging indicator of market performance.
