The problems at Marketfield aren't a microcosm of the liquid alts industry at large.
A little more than two years ago, I wrote a Fund Spy called "A Red Giant Engulfs the Long-Short Category." The red giant in question was the MainStay Marketfield fund, whose "supernova-like asset growth" had resulted in $13.4 billion in new assets in 2013 and a peak of more than $20 billion in assets under management, up from a mere $35 million in assets at the end of 2008.
Over the past two years, things have changed radically for the erstwhile liquid alternatives poster child. To put it mildly, the red giant has run into a serious gravitational force.
Performance first hit some rough spots in early 2014 (noted in my article at the time) and has kept running south since then. Marketfield's trailing three-year return through Aug. 31, 2016, of negative 6.35% annualized (A shares) ranks in the bottom of the long-short equity Morningstar Category. Assets have gushed out at an astonishing rate, with the fund most recently checking in with $982 million in AUM, 1/20th of its peak size. In April 2016, Marketfield Asset Management reacquired the fund from New York Life (the parent to MainStay Funds), added CEO Michael Shaoul as a named portfolio manager alongside since-inception manager Michael Aronstein, and set about the work of restoring the fund's performance and reputation.
Clearly, serious investing mistakes were made at Marketfield. Equally apparent, MainStay made some egregious missteps in the marketing of the fund.
Less clear to me is the claim that, as many in the media would have it, the problems at Marketfield stand in miniature for the problems experienced in the liquid alts industry at large. That's a convenient narrative for those seeking attention-grabbing headlines, but it's not a helpful diagnosis of what ails either Marketfield or liquid alternative funds.
A Brief History of a Rise and Fall
Marketfield MFLDX, while classified as a long-short equity fund by Morningstar, also shares characteristics of global macro funds. The fund allocates long and short globally based on themes generated through the macroeconomic research and views of Aronstein and his team, largely implemented via individual securities (and occasionally baskets of securities or exchange-traded funds).
Marketfield established its reputation in the 2008-09 period, when the fund lost only 13% in 2008 (Aronstein shorted many financials) but pivoted adroitly to earn 31% in 2009, thus achieving the rare feat of beating the S&P 500 in both years. Aronstein and company continued to hit the right notes in 2010 and 2011, keeping pace with the index and crushing long-short equity peers. Even after that stretch of success, however, the fund was still relatively small, shy of $1 billion at the end of 2011, with growth coming mainly via word of mouth, as the firm made little effort to market the fund.
It was only after MainStay acquired the fund in 2012, taking over distribution duties while Marketfield Asset Management remained as subadvisor, that the fund's asset growth really took off. There was a great performance track record to sell, and clearly advisors sold it--in spades. MainStay, looking to get a foothold in the fast-expanding liquid alternatives space, caught hold of a rocket ship. There's no direct evidence that the massive inflows had a role in the fund's later underperformance, as Aronstein has generally used large, liquid stocks and indexes to implement his ideas. It's true that the fund shifted to a greater international focus, though Aronstein has said this was a result of the opportunity set rather than a need to deploy capital. Still, it's hard to imagine that the inflows and acclaim didn't at least have an indirect effect, whether in pressure to put money to work, match past success, or simply meet the burdens on time from advisors, investors, and the press.
But what were they selling, exactly? It seems that many investors were seduced by a record that suggested a fund that could do well in any kind of market, a sort of uber-hedge fund in a liquid alternatives wrapper. Even as Aronstein tried to tamp down expectations, investors kept pouring in, and as is so often the case with the habits of mutual fund buyers, they got in only to miss out on most of the gains the fund had accrued, but were in time for a stretch of underperformance that started in 2014. Over the five years from July 1, 2011, through June 30, 2016, the fund's annualized total return was barely positive at 0.36%, while its investor return was negative 2.37% annualized (based on quarterly data because of data limitations). In contrast, from its August 2007 inception until July 2011, the fund returned 8.5% annualized compared with negative 0.27% annualized for the S&P 500 during that period.
To try to turn Marketfield's struggles into an indictment of alternative funds as a whole is to miss the point. Marketfield's woes, at least from an investment perspective, are more indicative of the problems of a certain brand of active management. Yes, Aronstein uses shorting in the fund, but not to hedge so much as to generate alpha by taking active stances against companies or industries. He has a proclivity for making concentrated thematic bets, and it was his degree of conviction and the overlapping of positions dependent on a resurgence in global inflation that got the fund wrong-footed. This is a pattern--a stretch of great performance followed by a high-conviction bet gone seriously awry that torpedoes both performance and assets--that we've seen historically from active fund managers like Legg Mason's Bill Miller, Fairholme's Bill Berkowitz, and more recently the skippers of Sequoia Fund. As John Rekenthaler has argued, these types of strategies are ever more rare in a mutual fund industry increasingly leaning passive and risk-aware.
It's true that liquid alternative mutual funds have disappointed, but they constitute too broad and diverse a group to ascribe a single cause to their ailments. To the extent such funds have struggled, however, in most cases it's not due to excessive risk-taking or large, misaligned bets (though certainly funds other than Marketfield have been guilty of this). Rather, many managers have been overly hedged, believing that equity markets were overvalued and bond markets were due for an interest-rate rise, while high fees have cut into their modest expected-return positioning.
The one area where painting with the liquid alts brush rings true is in the marketing and sales approach to Marketfield. We don't know exactly what MainStay's sales pitch was for the fund, but it seems safe to assume that many investors were not fully cognizant of the fund's risks and probably had little idea of the fund's exact investment approach. When investors are being sold on a concept (whether it's "liquid alts," "smart beta," or any other trend of the moment) rather than a specific investment, bad things are likely to happen. Alternatives have their place in investor portfolios, but it's incumbent on fund companies to responsibly educate advisors and investors on how to use them and what their risks are.
Options on the Table for Investors
For investors who still have money in the fund, the key questions are whether to stay put and what they can expect going forward. Our Morningstar Analyst Rating of Neutral suggests that the fund is likely to earn only category-like returns over the long term. But those returns are likely to come in very lumpy fashion. Investors should be prepared to ride out long stretches when the fund's high-conviction bets are out of favor. Considering the rough period the fund has endured the past three years, now might not be the wisest time to sell shares. Eventually the fund should find its footing, and after a period in which Aronstein seemed to have little in the way of new investment ideas, more recently he has found several encouraging themes, such as shorting asset-management firms that he believes will be impacted by pressures on profit margins. But investors who are uncomfortable with the levels of uncertainty and concentration here might well consider seeking out more-traditional and predictable offerings.