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A Fund Company Gold Rush Into Long-Short

Is it a contrarian signal?

Russel Kinnel, 06/08/2010

In the fund world, one of the best contrarian indicators is fund launches. When a bunch of fund companies launch funds in the same category, it usually means the sector is overheated, overhyped, and overpriced. There were Internet fund launches in 1999 and 2000 and global real estate launches in 2007. You can see some of the effects here.

Today, the hot category is long-short. We've seen 22 separate long-short mutual fund launches in the past 12 months. A year ago there were only 78 funds in the long-short space.

The problem with hot fund launches is that fund companies are chasing flows, which are in turn chasing performance. By the time one catches up to the other, it's usually way too late.

In this case, it's easy to see why long-short funds are spreading like wildfire. The 2008 bear market was one of the all-time nastiest, so a fund that offsets its long positions with shorts would naturally appeal. Unlike the previous bear market, there really were no places to hide in equities.

Just as with other hot spots, a couple of the more successful entrants have been raking in the money. Hussman Strategic Growth HSGFX is nearing $6 billion in assets thanks to its smallish 9% loss in 2008 and an impressive 3.6% gain so far this year.

Nipping at Hussman's heels is Bill Gross' PIMCO Fundamental Advantage Total Return PFSDX, which is nearing $4 billion just two years into its existence. (Thank goodness those kids at PIMCO are going to make a go of it.) The fund's institutional share class launched at the end of February 2008, and it had a marginally positive return that year and is up a nifty 6% this year.

In 2009, long-short funds took in a record $10.3 billion last year and they are on track to break that record this year. Through April 2010, they took in $6.3 billion, which makes it the seventh most popular fund category in 2010.

That is what's inspiring many of the new entrants from Prudential, JP Morgan, Keeley, Dreyfus, Leuthold, and more. Interestingly, Dreyfus was a mutual fund pioneer in this area. Dreyfus Market Neutral was launched more than 10 years ago and was one of the first market-neutral funds around. However, it performed poorly and was snuffed out.

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