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Category Overview: Long-Short Funds

The best long short funds participate in the upside more than the downside.

Philip Guziec, CFA, 07/11/2013

Long/Short equity funds lagged the market in the first half of 2013, as one would expect in a strong market rally, but investors are still piling in. In the first half of 2013, the Long-short category saw $6.2 billion of inflows, and added five new funds, bringing the total to 100. These funds are increasing in popularity because the strategies hope to adjust exposure to the stock market to capture much of the upside of market moves, without most of the downside.

For example, the average return for the category in the first half of 2013 was 5.8%, but returns ranged from negative 34.2% to 18.2%, because long-short equity managers can vary the exposure they take to the market. Some managers stay on the low end of the range (30% net long stocks), while others can go much higher (up to 80%). Because of the wide range of risk-taken, the best way to compare long-short funds is by risk-adjusted return measures, such as alpha above a benchmark (the S&P 500, for example), or Morningstar Risk-adjusted Return. 

The Morningstar Risk Adjusted Return over the five years ended June 2013 was a negative 0.1% for the category.  Silver rated Gateway GATEX had a risk adjusted return of negative 0.36% over the same time period, but tax efficiency adds value to Gateways strategy of reducing portfolio volatility by buying stocks and selling call options on an index, while using a proceed of the call option sales to purchase put options against a major market decline.  The fund also sells losing stock holdings to offset gains, while avoiding selling stocks with capital gains.   

Bronze rated Robeco Long/Short Research BPLSX generated an eye-popping 15.0% risk adjusted return over the past five years. Robeco’s fund determines its equity exposure through a bottoms up fundamentally research process. Mainstay Marketfield MFLDX , also Bronze rated, generated a 9.0% return over the past five years by following a top-down, macro-economic themed investment process.     


Philip Guziec, CFA, is Morningstar's derivatives investing strategist. He leads Morningstar's OptionInvestor service, which applies Morningstar's fundamental research methodology and fair value estimates on 2,000 stocks to uncover option investing opportunities. Guziec joined Morningstar in 2003 after a career as an engineer and management consultant. Learn more about OptionInvestor.

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