Long-Short' Funds Missed Their Moment -- Journal Report
August 09 2020 - 6:29PM
Dow Jones News
By Simon Constable
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.
Long-short funds are those that allow portfolio managers to bet
on securities they expect to rise in price, as well as those they
expect to fall in price. They accomplish the latter through short
selling, or selling borrowed stock in the hopes of repurchasing it
at lower prices for a profit. Most traditional funds allow managers
only to go long, or benefit from increasing prices.
"This seemed like it was a great environment for long-short
strategies as we saw U.S. equities fall into a bear market and
subsequently recover much of the losses," says Todd Rosenbluth,
head of ETF and mutual-fund research at CFRA.
SPDR S&P 500 ETF (SPY), an exchange-traded fund that tracks
the S&P 500 stock index, fell more than 30% from Feb. 19
through March 20, according to Yahoo. By the end of June, it was
down only 8.4% as the market rebounded. (Neither figure includes
dividends.)
Theoretically, long-short funds should have been able to profit
from the initial drop in the market in late February and much of
March by selling borrowed stock. The funds then had an opportunity
to add to those gains by buying stocks ahead of the subsequent
rally that started on March 23.
Yet, as Mr. Rosenbluth points out, the majority of funds in the
category lost money, some substantially.
Only 30 of the 99 funds that fit into this so-called long-short
category reported gains in the first half of the year, according to
data from Morningstar.
ProShares Long Online/Short Stores ETF (CLIX) performed best
over the 26 weeks, with total a return of 48%. The worst performer
was Pzena Long/Short Value Fund (PZILX), which lost 28%.
Part of the problem for long-short fund managers was that the
selloff and rebound occurred so rapidly. "Investors had to be great
at timing the market to capture both sides of the trade," Mr.
Rosenbluth says.
In addition, there typically are few restrictions on how the
managers of long-short funds are allowed to invest money. "They are
like a blank canvas," Mr. Rosenbluth says, which explains the wide
dispersion of returns from the 99 funds in the group.
Making things more challenging for fund managers was a
divergence in the performance of individual stocks that before the
crisis were viewed as direct competitors, says Jack Ablin, chief
investment officer and founding partner at the wealth management
company Cresset Capital.
Netflix and Walt Disney, for example, "went into 2020 as
head-to-head rivals in the entertainment business, and coronavirus
drove a wedge between the two as the latter had to close its theme
parks," Mr. Ablin says. Meanwhile, Netflix got a boost from
streaming video from people stuck at home.
Put another way, Covid-19 in some ways changed the nature of the
economy and hence the nature of stock picking. In turn that made it
more challenging for fund managers to sort the winners from the
losers
Overall, money flew out of the long-short sector, but one fund
stood out, Neuberger Berman Long Short Fund (NLSIX), which
attracted $824 million in new assets over the period.
Mr. Constable is a writer in Edinburgh, Scotland. He can be
reached at reports@wsj.com.
(END) Dow Jones Newswires
August 09, 2020 18:14 ET (22:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
Walt Disney (NYSE:DIS)
Historical Stock Chart
From Mar 2024 to Apr 2024
Walt Disney (NYSE:DIS)
Historical Stock Chart
From Apr 2023 to Apr 2024