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By Jason Stipp | 09-20-2010 04:15 PM

Do You Need a Short Equity Position?

The long/short equity asset class over time has actually produced as good if not better returns with less volatility than the S&P 500 or the MSCI World Index, says Mars Hill Partners' Jason Huntley.

Jason Stipp: I'm Jason Stipp for Morningstar reporting from the 2010 ETF Conference here in Chicago.

Optimizing risk and return in your portfolio. I'm here with Jason Huntley. He is the founder and portfolio manager of Mars Hill Partners. He is here to tell us a little bit about their fund, it's a long/short fund, a little bit about their philosophy and a little bit about their portfolio positioning today.

Thanks for joining me, Jason.

Jason Huntley: Thanks for having me.

Stipp: The first question for you, you do run an actively managed long/short equity fund. You look across the globe in some of your investments, and I read a little bit about your philosophy.

The first thing I wanted to ask you about is one of the things you mentioned, which I think is a pertinent point for investors, is that risk and return are not always positively correlated.

So you might end up taking on more risk and not really getting compensated for return. That's one of the things that you feel your philosophy addresses. Can you explain a little bit about why that is and how your fund works in that context?

Huntley: So the context of that statement is in comparing a long/short equity portfolio construction versus a long-only portfolio construction. So in the long-only portfolio construction world, which is the majority of how investors access equity markets and so forth, having total exposure to the direction also exposes a portfolio to substantial drawdown risk, a la events like September 2008, when the Lehman crisis comes along and shocks the portfolio, and you might be an excellent stock-picker, have an edge in identifying relative winners that you hold long-only, and you have value-added producing the portfolio over some benchmark, but that doesn't have a natural sort of risk mitigation mechanism built into it, versus long/short portfolio construction naturally has dollars on the short side of the portfolio, so that if you get a market-wide, more systemic shock to somebody's portfolio, you've got a downside buffer mechanism built in that helps smooth returns over time.

So, in the world of absolute return, which is where we dwell and which is really where the strategy is geared toward, again that long/short portfolio construction is what, in our view, what optimizes the risk/return, risk/reward payoff in the portfolio.

Stipp: I think a lot of investors, when they think about protecting on the downside, they think about their asset allocation and allocating some of their funds to bonds, which they would expect would offer some of that protection. How should I think about fund such as yours in the context of a portfolio that would include stocks and bonds?

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