The world would be a better place if certain mythical creatures existed. It would be nice to spot a unicorn amid the deer grazing on your hostas. Heck, I’d settle for a jackalope.
Among other quasi-mythical creatures are the stock fund managers who can make money in bull and bear markets. In theory, this is possible. After all, you can make money by buying stocks, which is called “going long.” You can also make money on stocks that fall by selling shares and repurchasing them at a lower price — a process called “going short.”
Lately, the fund industry has been pumping out funds that are both long and short. Not surprisingly, they’re called long/short funds. The strategy, borrowed from the hedge fund world, gives some protection in a bad market, while also giving you much of the return from a bull market.
As a group, the long-short funds have performed decently since the stock market’s most recent peak on May 20, 2015. The median long/short fund — half higher, half lower — is down 4.52% through Wednesday, vs. a 7.85% loss for the Standard and Poor’s 500 stock index with dividends reinvested.
Unfortunately, the farther back into the record you look, the worse things get. The past 12 months, for example, the median long/short fund has fallen 2.5%, vs. a 0.64% loss for the S&P 500. Go back five years, and long/short funds are up 5.71% a year, vs. 14.72% for the S&P 500.
What happened? Part of it may well be the fact that while some people are good at shorting, and some are good at going long, relatively few managers are good at both sides of the game. And a long/short strategy gives you the opportunity to be wrong as well as right in both directions.
Another big factor: Expenses. The median expense ratio for long/short funds is 1.77%, which, in technical terms, is called “horrible.” It’s hard enough to beat the S&P 500 without sporting it 1.77 percentage points a year.
A few long-short funds deserve honorable mention. Caldwell & Orkin Market Opportunity (COAGX) has gained 4.2% during the recent unpleasantness, and is up 11.1% for the full year. (It’s up just 5.36% a year the past five years, though). Burnham Financial Long/Short (BURFX) is up 3.61% for the mini-correction and 14.9% for the year. It’s up an average 14.91% a year the past five years.
Guggenheim Opportunity Alpha A is the only long/short fund to have beaten the S&P 500 for the past five years, scoring an average 15.54% gain. It has lagged the index in the recent correction and the past 12 months.
The other thing to consider about long-short funds is this: Adding a 10% position in a long/short fund to your stock portfolio will have about the same effect as a mosquito on a moose. And betting entirely on a long-short strategy seems like a longshot. You’d probably have more fun hunting jackalopes.