This screen is a good starting point for navigating an eclectic group of "alternative" options.
Searching for an appropriate long-short fund for your clients' portfolios requires extra homework. After all, the category represents a fairly eclectic group: Some strategies can be appropriate core holdings for risk-averse investors, while others are more sensitive to stock price movements and might provide less of a cushion in a downturn.
Morningstar Office and Principia are helpful tools for combing through the long-short category. Given the wide range of strategies at play, we searched for long-short funds with five-year records that came out ahead of the category average during that time frame. And because style and management consistency should be a top priority, we made sure that the current management team was responsible for the five-year record.
Special Criteria = Distinct portfolios only
And Morningstar Category = Long-Short
And % Rank Cat 5 Yr <= 50
And Manager Tenure (Longest) >= 5
Lastly, it's key to limit the results to funds with below-average fees. Funds in this category tend to sport some pretty hefty expense ratios, especially those with smaller asset bases or more trading-intensive strategies. So, we required that the funds be open to new investments with expense ratios under 1.5% annually.
And Purchase Constraints not = Closed - New Investment
And Audited Expense Ratio < 1.5
After performing this initial sweep, we suggest following up with Morningstar Fund Analyst Reports to get a sense of how these funds have fared during various market cycles in order to find the portfolio complement or anchor that best suits your clients' needs.
As of Oct. 15, this screen pulled eight funds from roughly 75 options in the category. We'll highlight some examples of long-short portfolio anchors and supporting players that get a green light from Morningstar analysts.
Hussman Strategic Growth
This fund is one of the most reasonably priced options on the list. In fact, it was one of the cheapest options in its category even before the fund's board decided to slash its expense ratio to 1.04% annually from 1.1%. In addition to this shareholder-friendly move, we've been impressed by other steps taken by this fund's management. For example, manager John Hussman provides weekly commentaries and low minimum investments, and he has a sizable personal investment alongside fundholders. In addition, the fund is overseen by an independent board, which is compensated in fund shares.