Writing in The Wall Street Journal, Simon Cable declared “‘Long-Short’ Funds Missed Their Moment” (8/9/2020, paywall). His argument: “The stock-market volatility in the first half of 2020 should have been a near-perfect period for ‘long-short’ mutual funds and exchange-traded funds to make a killing. Unfortunately, less than one in three such funds made money for investors during this tumultuous period.” His analysis was that the market’s moves were too quick for most investors to capitalize on them (even if they recognized the opportunity).
He notes that Neuberger Berman Long-Short (NLSIX) raked in the most cash and that the ProShares Long Online/Short Stores ETF had the top YTD performance.
“Most funds are mediocre” is not a terribly useful insight. We decided to identify the 10 best performing long-short funds YTD (all posted double-digit returns) and look at their longer-term prospects. We did that by asking (a) do they qualify as MFO Great Owl funds and (b) have they also been top 10 funds over the past 3- and 5-year periods.
Our findings are reassuring and, we hope, useful. All seven MFO Great Owls posted positive YTD returns, all have been consistently excellent in risk-adjusted returns over time and all outperformed the S&P 500 this year with higher YTD returns and smaller losses (down an average of -3.5% versus -19.7% for the S&P) during the tumult in the first three months of the year.
The table below summarizes the performance of 2020’s top-ten long-short equity funds. Funds that have earned the Great Owl designation are shaded in blue.
|2020 returns, through 7/30||Top 10 fund 2020?||Top 10 fund 3 year?||Top 10 fund 5 year?|
|ProShares Long Online/Short Stores||74.8%||Yes||Too young||Too young|
|RiverPark Long/Short Opportunity||36.7||Yes||Yes||Yes|
|Alger Dynamic Opportunity||27.4||Yes||Yes||Yes|
|Arin Large Cap Theta||25.0||Yes||No||Yes|
|Aperture Discovery Equity||22.7||Yes||Too young||Too young|
|Hundredfold Select Alternatives||19.2||Yes||Yes||Yes|
|Virtus KAR Long/Short Equity||17.9||Yes||Too young||Too young|
|RealityShares DIVCON Dividend Defender||12.2||Yes||Yes||Too young|
|Anchor Risk-Managed Equity||10.6||Yes||Yes||Too young|
Snapshot for the top long/short funds
These are two funds from the list above (2020’s top performers) which are also MFO Great Owl funds or, at least, have landed in the top 10 of long/short funds for 2020 as well as the preceding 3- and 5-year periods. The difference between the two designations is that Great Owls must have top quintile risked-adjusted returns in every trailing period longer than one-year; some top-performing funds are simply more volatile than that metric rewards.
RiverPark Long/Short Opportunity (RLSFX): five-star fund, MFO Great Owl, $317 million in assets, 2.0% expense ratio, $1000 minimum initial investment.
Managed by Mitch Rubin, RiverPark combines thematic analysis with stock-by-stock decisions on who to invest in and who to short. Individual companies operate in a larger environment. If that environment turns hostile, even the best-run companies will struggle. As an example, if you’re in the “big box retail” business, firms with average management will be in a death spiral and even firms with great management teams will likely just end up in slow decline. If you’re in the “next-gen battery” business, firms with average management will thrive and firms with great management will soar. RiverPark invests in the best firms in rising industries and shorts the weaker firms in declining ones. RLSFX tends to have both dramatically higher returns (9.0% annually since inception, versus 4.0% ) and greater volatility (standard deviation of 10.5%, versus 9.4%) than its peers. We profiled RLSFX in 2012, shortly after its conversion from being a hedge fund, but it’s appeared in more than a dozen articles on strong alternative funds since then.
Folks interesting in a long-only fund might like at Mr. Rubin’s RiverPark Large Growth Fund (RPXFX) which is approaching its 10th anniversary.
Alger Dynamic Opportunities (SPEDX): five-star fund, $320 million in assets, 2.0% expense ratio, $1000 minimum initial investment.
A more-or-less old-style long/short fund: they have two teams of managers, one of which specializes in small caps. They invest long in attractive growth stocks and they short companies with deteriorating fundamentals. Their net long exposure is typically 60-70%.
Hundredfold Select (SFHYX): five-star fund, MFO Great Owl, $100 million in assets, 2.9% expense ratio, $5000 minimum initial investment.
Portfolio construction begins with a basket of high-yield fixed-income securities managed for steady returns and limited volatility. These securities are complemented with alternative strategies including a variety of short-term equity trading strategies, investments in long/short, absolute, or merger strategies, and the ability to move into cash depending on market conditions.
The management fees earned by Hundredfold Advisors are passed through to a nonprofit organization called Simply Distribute which supports medical, religious, scientific, and educational nonprofits throughout the world. Since 2004, Hundredfold Advisors has donated more than $5 million to designated charities
Longboard Alternative Growth (LONAX): four-star fund, not an MFO Great Owl, $17 million in assets, 2.24% expense ratio, $2,500 minimum initial investment.
The fund’s tactical investment process allocates to a portfolio of U.S. equities as well as alternative assets such as global bonds, currencies, TIPS, commodities, and gold.
As an aside, their website made my eyes hurt. Content is thin and I don’t even see direct links to an annual report, much less any sort of shareholder communication. Morningstar categorizes their portfolio as 94% cash and 6% other, which isn’t terribly informative. In short, they may do a fine job but you’re on your own in figuring it out.
RealityShares DIVCON Dividend Defenders ETF (DFND): five-star fund, MFO Great Owl, $39 million in assets, 1.44% expense ratio.
This passive fund tracks a custom index. The index uses DIVCON, a forward-looking dividend rating system evaluating large-cap company health indicators based on seven key factors, with a 75% long investment in companies most likely to increase dividends and a 25% short in the firms most likely to cut their dividends.
The one immediate caution is that RealityShares other two dividend-focused ETFs are not particularly good which always raises the “luck or genius” question.
Anchor Risk-Managed Equity (ATEAX): five-star fund, MFO Great Owl, $225 million in assets, 2.05 % expense ratio, $1,000 minimum initial investment.
This is a top-down quant fund that invests in ETFs, stock mutual funds, and futures contracts. If their trend-analysis models turn negative on the stock market, they move some or all of the portfolio into Treasuries, short positions, or short ETFs. The reported portfolio turnover is 1100%.
Any article that begins with the sentence, “Most funds in this category have simply not proven their worth,” is bound to be right. MFO’s founding premise is that the vast majority of funds and ETFs could vanish overnight and no one, except the managers, would be any poorer for it.
The key is remembering that “most disappoint” does not immediately signal “must disappoint.” Some managers have managed to navigate, honorably, and well, through a variety of market conditions. MFO’s Great Owl designation recognizes the funds with the most consistently excellent risk-adjusted-performance.
In 2020, all seven of the MFO Great Owls in the long-short equity category are in the black and all seven have outperformed the S&P 500’s 2.1% YTD gains. This article just highlights the four with double-digit YTD returns.
While there are some intriguing newcomers (the Virtus KAR folks seem talented and very successful across a range of funds), RiverPark Long/Short Opportunity remains the top choice based on long-term performance.