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A Long-Short Equity Fund That's on Our Radar

Gretchen Rupp

Gretchen Rupp: One fund we're watching is Prudential QMA Long-Short Equity. The fund's track record since May 2014 is relatively short, but the team's quantitative model has been used to successfully short stocks since 2006.

QMA is an independent subsidiary of Prudential, and its strategies hold more than $100 billion in quantitatively managed assets, including index funds. The firm has more than 50 professionals with about 20 Ph.D.s. 

The long-short equity fund's model picks stocks from the Russell 3000 Index, covering a wide spectrum of stocks from small to large cap, and value to growth. Managers adjust the beta exposure tactically with a targeted range of 0.2 to 0.8. During the year through January 2018, its average beta was 0.4.

The quantitative model sorts stocks into three categories based on earnings growth expectations: slow, average, or fast. Each stock is scored using inputs that broadly roll up to three factors: value, growth, and quality. The team factors in borrowing costs when deciding which stocks to short, and the managers keep the mid- and small-cap names net neutral between long and short positions in an attempt to keep a lid on overall fund volatility.

Like other long-short funds, this fund's objective is to provide equitylike returns with lower volatility, and so far the fund has met its objective. Since June 2014 through January 2018, the fund's 8.5% annualized gain is about 64% of the S&P 500's, but it's provided these returns with only 34% of the S&P 500's volatility.

Investors might consider long-short funds if they are looking for equitylike returns with less volatility.