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Josh Charney: There was once a time where investors needed to look to hedge funds to invest in long-short equity strategies. Today that is no longer the case. There is now $57 billion in long-short equity mutual funds, which is a 200% increase since 2011. There are approximately 110 funds for investors to choose from and Morningstar covers 17 of them and gives seven of them a positive, favorable rating.
The reason investors are clamoring for long-short equity funds is because they are generally a safer place to invest with a lower volatility than the market.
In 2008, for example, these funds fell 13% compared with approximately 37% for the S&P 500. That is because these funds have generally a lower beta than the S&P 500, of about half. In an up year like 2013, one would expect these funds to underperform, as well. For example, last year, the funds went up approximately 14% compared with 32% for the S&P 500. But besides beta, investors would be smart to look at alpha, or manager skill. Morningstar analyzes alpha on both the long side and the short side of the portfolio.
Other things we look at are a management team that has a proven track record in short-selling securities, which can be relatively dangerous as well as a firm that is not new to any of these strategies. Some of the funds we like in this area are Robeco Boston Partners Long/Short Equity, Robeco Boston Partners Research Fund, MainStay Marketfield, and Wasatch Long/Short.