Long/Short Equity Funds: The Best and Worst of September

Long:Short Equity Funds The Best and Worst of SeptemberLong/short equity was the approach behind the first-ever “hedged fund” in the 1940s, and it remains the most popular hedge-fund and alternative mutual-fund style today. According to Morningstar, long/short equity mutual funds returned an average of -1.78% in September, which beat out the long-only S&P 500’s returns of -2.64%. As pointed out by Cliff Stanton in a recent article on long/short equity, long/short alpha generation is especially valuable in a low-return environment, and that’s why the month’s best-performing long/short equity funds’ gains were particularly sweet in September.

Top Performers in September

September’s top-performing long/short equity mutual funds included a pair of $100 million-plus funds that launched in 2013, along with a 2015 upstart with less than $13 million in assets under management (“AUM”):

The LJM Preservation and Growth Fund, which debuted in January 2013 and had $143 million in AUM as of October 19, 2015, was by far the biggest standout of the month, gaining a whopping 5.25%. The fund’s shares faltered in the final three months of 2014, but gained 11.19% in the first nine of 2015.

The AQR Long-Short Equity Fund posted gains of 3.98% in September, bringing its year-to-date total to +10.49%, through September 30. Unlike the LJM Fund, AQR’s long/short equity fund fared well in the final three months of 2014, and its one-year return through September 30 was a very impressive +17.31%. The fund debuted in July 2013 and had $320.2 million in AUM as of October 19, 2015.

The Longboard Long/Short Fund is the new kid on the block. It launched on March 16 of this year and had AUM of just $12.9 million as of October 19. The fund returned 3.47% in September, pushing its three-month returns into the black at +0.92%.

top 3 long short equity funds

Worst Performers in September

The month’s biggest losers lost much bigger than the biggest winners won. The Catalyst Hedged Insider Buying Fund (STVIX) and the Tealeaf Long/Short Deep Value Fund (LEFIX) lost 11.12% and 10.72%, respectively, making them by far the worst performers of the month. Both funds debuted in 2014 and had less than $10 million in AUM as of October 19. Longer-term, the Catalyst funds’ returns have been particularly abysmal, with the fund hemorrhaging an astounding 27.48% of its value in the three months ending September 30.

The much larger Goldman Sachs Long Short I Fund (GSLSX), which also debuted in 2014 but had $218.9 million in AUM as of October 19, 2015, fell 7.54% in September. Although its losses weren’t as deep, the Goldman fund – like the others on the worst-performers list – also had negative returns for the three-, nine-, and twelve-month periods ending September 30.

bottom 3 long short equity funds


While comparing long/short equity funds to their peers may help an investor to judge a manger’s decisions against all of the decisions he or she could have made, Cliff Stanton cautions against relying too heavily on peer analysis. The wide range of approaches within the long/short equity category limits the effectiveness of peer analysis.

Instead, Mr. Stanton says investors should focus more on “returns-based analysis” (“RBSA”) and “holdings-based analysis” (“HBSA”). The former measures exposure to equity markets as well as style factors and can isolate alpha, while the latter “produces a more granular factor analysis” by confirming exposures through fund holdings. Long/short equity strategies are attractive because they have the potential to provide more superior risk-adjusted returns in the current environment, but proper due diligence is required to select the best funds and avoid the worst.

Past performance does not necessarily predict future results.

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