Barron's took a look this weekend at something we've talked about quite a bit lately, which that not all long/short funds are the same. Barron's notes that the top performer in the group as categorized by Morningstar is up 45% year to date while the worst performer is down 60%.
In trying to examine this, I've talked in terms of process versus stock picking and the expectations that past performance can provide. Talking about past performance is a watchout situation but the context is not seeking a fund that outperforms the market. What I mean is that if a long/short fund looks like the stock market on the way up then it is likely to look like the stock market on the way down whether that's a little better or a little worse. My thoughts on long/short is that I am not interested in a stock market proxy. I am interested in something that sets the expectation (no guarantees) that it will zig when the market zags like client holding BTAL or act as an absolute return/market neutral product like MERFX which is also a client holding.
It is perfectly valid for a long/short fund to do bottoms up analysis to buy stocks it thinks will do well and short stocks it thinks will do poorly but that is more of an alpha seeking strategy, not a protective strategy. If alpha seeking resonates, the yeah, you should find some fund that gives you a reason to think it can offer alpha. I would have zero expectation though that a long/short fund that seeks alpha would offer any protection in a downturn. Great if it does but that would not be my expectation.
I think the Barron's article leans in my direction on this talking about funds that are "quantitative, rules based, and systematic" which to me is synonymous with process driven which is how I view BTAL and MERFX as well as BLNDX which I've mentioned a couple of times before and just added for most clients last week. Barron's then did a semi-deep dive on the ABR Dynamic Blend Equity & Volatility Fund which has two symbols; ARBTX for retail accounts and ARBVX for institutional accounts.
I'd never heard of before this weekend so I am trying to learn about it or learn something from it. It goes long stocks and buys VIX futures, as Barron's points out it's long short conceptually because buying VIX futures is negative beta (stocks are positive beta). It dynamically shifts its exposure to VIX futures based on a systematic process. The fund is about five years old and here is how it's done versus the S&P 500;
The fact sheet provides some metrics beyond simple return data. The beta is 0.10 versus 1.00 for the S&P 500 and it has a very low correlation to the S&P 500 of 0.13. I am suspicious of that correlation number, I think this year has skewed it dramatically. Looking at the chart it looks to me like it tracks the S&P 500 but on a different trajectory. There was a a short period in early 2018 where it went up while the S&P 500 went down. In the panic of late 2018 it went down a lot of the way with the S&P 500 but not all of the way. It does appear that it nailed the Coronapocalypse, at least up to this point.
I'm intrigued but not compelled at this point so I will circle back around in a bit to see if it can improve its upcapture or have another strong result in a down market.
ABRTX is not an ETF it is a traditional mutual fund. The other day I listed in on a webinar from Toroso Asset Management and Mike Venuto made the observation that a lot of mutual funds target alternative strategies, more so than ETFs seemed to be his implication. I think it is important to be wrapper agnostic. I've long said that it doesn't make sense that one wrapper could be the best for all exposures and strategies. When ideas like ABRTX come up that seem interesting, take the time to learn even if the wrapper is off putting and it's ok to learn about a fund and then not buy which is where I am with ABRTX.