Mining the Short Side

Ali Motamed, manager of the Invenomic Fund, doesn’t fear market downturns. In fact, he seems to relish them.

“The reaction of many long-only investors to a market slide is to hold their foreheads in their hands and wait for the carnage to be over,” says Motamed. “For us, it’s an attractive and fun time.”

This cheeriness in the face of adversity is rooted in the 41-year-old manager’s conviction that down markets should be mined rather than feared. “We believe that we can make money on our investments without taking on big market risks, and that we can take advantage of security mispricing on both the long and short side,” he says.

Unlike most mutual funds, the Invenomic Fund employs an active short-selling strategy for individual securities in its portfolio. In its two-year history, its net long allocation (the percentage of long positions minus the percentage of short positions) has ranged from around 17% to almost 38%, depending on where Motamed sees the best prospects for grief or prosperity. He makes decisions about allocations to both sides of the portfolio by looking stock by stock, rather than by making projections about where the market is headed. The goal is to use short selling to make money for investors, as well as to hedge away some market risk.

The strategy has worked well for the fund thus far. Since its inception in June 2017, its risk-reward profile and especially its risk-adjusted returns have eclipsed those of most Morningstar peers in the long/short category according to David Snowball, co-founder of the website Mutual Fund Observer. “Their approach is distinct, their strategy is disciplined and their manager is well-tested,” Snowball recently wrote. “On the whole, investors anxious about both preserving capital and generating positive returns in turbulent markets should consider putting the fund high on their due diligence list.”

Before founding Invenomic Capital in early 2017, Motamed co-managed the Boston Partners Long/Short Equity fund and was Portfolio Manager of the Year in Morningstar’s alternatives category in 2014. He will be a featured speaker at this year’s Inside Alternatives & Asset Allocation conference in Philadelphia on October 29, along with Charles Clough of Clough Capital.

Shorting Opportunities

The danger with long-short funds, of course, is that in long-term bull markets with little volatility—the same conditions that have prevailed for most of the past decade—long-only portfolios capture much better returns. But Motamed believes a number of elements are in place that could make short selling a winning strategy now.

“This has been the longest bull market in history, and valuations suggest this is not a good time to be long-only,” he says. “Investors need to stop looking in the rearview mirror and avoid being wedded to long-only strategies.”