These Long-Short Funds Have Recently Fallen Short

The past few weeks have been marked by a market downturn, a time when funds with the ability to short stocks--or bet against them--should have shone brightly relative to pure equity funds.

Long-short funds, which fall under the alternative funds umbrella, typically hold a combination of both long and short positions. Their managers will shift their net long and short exposure--based on bottom-up research or their macroeconomic outlooks--to generate returns that are not tied to the market's fortunes. In bull markets, long-short funds might lag their long-only counterparts. But during bear markets, these funds' abilities to bet against stocks gives them competitive advantages. In the past month, for example, the broad U.S. Market (as measured by the S&P 500) posted losses of 8.3%. Even though long-short equity funds didn't escape unscathed, their losses were relatively light at 3.9%.

But some funds in the category posted more disappointing losses during the last month's downturn than others. With an eye toward unearthing long-short funds with relatively weak recent returns, we turned to the Premium Fund Screener to sift through the long-short equity category for funds that have recently performed worse than one might have expected, with losses of more than 5% during the past four weeks. To further streamline our results, we called up funds with analyst research available and eliminated all but the distinct portfolio of each fund. Below, we highlight two of the biggest losers (as of Aug. 16, 2011) that our screener yielded. Premium members can run the screen by clicking here.

The bottom line isn't to avoid these funds at all costs, but it is a reminder that very few investments deliver in all market conditions.

Bridgeway Managed Volatility BRBPX
Over the course of the past four weeks, this fund posted a 5% loss, trailing more than half of its category peers. The fund typically holds a component of government bonds--a rare bright spot during the recent sell-off. However, the two sibling funds it relies on for most of its stock picks, Bridgeway Aggressive Investors 1 BRAGX and Bridgeway Large-Cap Value BRLVX, have recently posted disappointing returns. And unfortunately, manager Dick Cancelmo's strategy for limiting downside volatility--writing covered calls--wasn't enough to offset losses from the equity positions. Morningstar analyst Greg Carlson still believes the fund's attributes make it a worthy holding, but its idiosyncratic strategy makes this offering best-suited to the periphery of a diversified portfolio.