Long/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%.
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.
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.