Analyzing returns from the short side is critical in examining these funds, since shorting is one of the prime differentiating practices of these funds. In addition to Robeco’s funds, MainStay Marketfield has also added value on the short side. But not all funds attempt to deliver absolute returns from the short side. Some managers use put options, which will typically don’t make money but hedge the long exposure.
Financial advisors who use long/short funds should also consider the varying exposures of these offerings. While the funds typically have risk targets they attempt to achieve, both their gross exposure (which measures the absolute percentage of equity invested in stocks) and net exposure (which subtracts short exposure from long exposure to arrive at the amount of unhedged long exposure) can change, which means there is some element of market timing at these funds.
For advisors familiar with the risks of ‘style drift,’ this approach can be anathema. But coming to terms with this risk is a critical part of becoming comfortable with these funds. “I am not looking for dogmatic managers who are very bullish or bearish, but rather those that navigate the field as situations change,” Charney says.
He notes that Morningstar generally doesn’t like market timing approaches, but adds that making thematic and uncorrelated bets across international markets has worked for MainStay Marketfield, and that both Robeco and MainStay Marketfield have experience and long track records with their respective styles.
And for some advisors, this type of flexibility creates opportunity. “Marketfield has delivered remarkable performance, with limited downside in 2008, and nearly full upside capture in the 2010-2012 period,” says Joseph Schwarz, a managing member at Schwarz Dygos Wheeler Investment Advisors LLC, a Minneapolis-based wealth management firm.
Schwarz currently allocates five percent of his clients’ portfolios—and ten percent of their equity allocations—to the MainStay Marketfield fund. “Although I worry if the performance is repeatable, and not just the result of a late 2007 launch, I am encouraged by the positive results of the quarter-over-quarter performance comparisons to the S&P 500,” says Schwarz.
Other Options
In addition to the Robeco and MainStay Marketfield offerings, Morningstar is also positive on some of the funds that use options to limit risk, including The Collar fund (COLLX), which is long equity and buys puts while selling calls, and the Gateway fund (GATEX), which uses the same option strategy and is tax efficient, Charney says.
The former is rated bronze and the latter is rated silver, and both carry an expense ratio of 0.94 percent.
Morningstar is also positive on the Wasatch Long/Short Investor fund (FMLSX), which has two portfolio managers—one with a tactical and macro approach, and the other focused on bottoms up stock picking. It charges 1.27 percent.