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Long-Short Funds Not All Created Equal

Josh Charlson, CFA

Josh Charlson: After the stock market volatility in August, it's worth taking a look at how the long-short equity category performed. These funds take a hedged approach to equity investing by usually shorting individual stocks or using baskets of futures or indexes or even options to hedge out their long equity exposure.

So, how did these funds perform in August? You would expect, based on their beta or equity sensitivity, that they should have reduced downside compared with the S&P 500. In fact, they performed within expectations. When we look at the stretch from Aug. 17 through Aug. 24, in which the S&P 500 was down 9.4%, funds in this category, on average, were down about 4.8%. That's within expectations. However, you have to be aware that there is a lot of variation in the category--both in terms of the approaches that fund managers take as well as the beta or exposure of the managers to the stock market.

So, for instance, Schooner Fund (SCNAX), which is an option-collar strategy where the manager had actually been increasing put protection earlier in the year, was up 4% during this period. Meanwhile, Wasatch Long/Short (FMLSX), which has a much higher level of equity beta, was down 7%. So, when you're selecting a long-short equity fund, you really need to be careful to know what you're getting into and make sure it's going to hedge the way you want it to.