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By Josh Charney, CFA | 01-21-2015 12:00 PM

How to Succeed in Short Selling

Diversification and size limits are key to managing risk in short positions, says Alternative Fund Manager of the Year team member Ali Motamed.

Josh Charney: Hi, my name is Josh Charney. I'm an alternatives analyst here at Morningstar. Joining me today is one of the Alternatives Fund Manager of the Year recipients, Ali Motamed from Boston Partners. Ali, thank you for joining me today.

Ali Motamed: Thank you for having us, and it's a real honor for our team to win this award.

Charney: Sure. So, looking at some of your fund statistics, the fund was in the top 5% for alpha generation for the long-short equity category. It was up 4.72%, which means it beat the category by 1.8%. Boston Partners Long/Short Equity (BPLSX) is one of the oldest funds in the category. It was incepted in 1998. It has the best 10-year returns and has had extremely good alpha generation since 2008. So, Ali, now that you're here with us today, can you tell us a little bit about the fund and what it does?

Motamed: Sure. We manage a variable long-short product. It's very diversified, mostly focused on the United States. Most of the time, we are fully invested on the long side and then we have a goal of absolute returns on our short portfolio, which is what leads to the variability in that. So, that portfolio has been as small as 9% of the fund and as high as 80% or 90%. And that leads to our net long positions that have varied from 90% to as low as 20%.

Charney: So, I understand the fund is very fundamentally bottom-up driven. Can you go into a little bit about that process and what it is that your team does on a daily basis?

Motamed: Sure. Everything we do is on a bottom-up level on stock-picking. We go through financial statements of up to 7,000 companies that fit our universe, which is a $100 million market cap or more in the United States. And we're trying to find longs that meet our investment criteria and shorts that we think will drive absolute returns and also meet our investment criteria. And so, as we look at that investment criteria, on the long side, we're looking for fundamentally good businesses that are at good values where things are basically getting better. And on the short side, generally we're looking for companies that have deteriorating fundamentals or are story stocks or have periods of unusual profitability where they are getting big multiples and credit as if that will continue in perpetuity, but the dynamics of the industry that they are in suggest it won't.

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