The Future Is in Long-Short Funds

Investors, especially retirees, can’t afford to have their portfolios blow up on them

I’m an optimizer by nature. In the investment arena, that means I typically look for the best long-term results, which means stocks of course. I acknowledge too that I have a higher than ordinary tolerance for risk.

Because of these two attributes, I used to wonder why people would consider buying bonds; and, I had no worries about piling into the market with the resources I could muster after the tech wreck and after 9/11.

Despite this sang-froid characteristic, I confess that I was not nearly so placid in the 2007-2009 market crash. The reason is that in the previous crashes I never for a moment had any doubt about the soundness of our institutions or leadership, which has not been the case more recently — but that’s a story for another time.

In any event, the 2007-2009 market upheaval for the first time gave me an appreciation for the value of a smoother investment ride. So it is with interest that I spoke briefly with Robert Kaimowitz, the CEO of Bull Path Capital Management, which operates both private hedge funds and a retail long-short fund aptly named The Long-Short Fund (BPFIX).

Long-short funds are not easy to define.

At this early stage in their development, they vary greatly in terms of what they invest in and how they invest. They mostly invest in stocks, but some invest in bonds.

They can use leverage and short positions and have more flexibility in going to cash than your standard stock fund — but they vary greatly in the extent to which they employ these methods.

According to Morningstar, there are currently 110 distinct portfolio long-short funds, of which 25 have 5 or more years of performance history. 

But back to Kaimowitz. He’s a trendsetter in the realm of hedge funds going retail.

The hedge fund industry was shaken up by the fallout over Bernie Madoff’s scheme, and smart managers are looking to diversify their assets as Kaimowitz is doing by bringing hedge fund techniques to Main Street mutual fund investors.

Though BPFIX opened to investors in June of last year, Kaimowitz operated its hedge fund antecedent within the parameters of mutual fund investing, and was thus permitted to incorporate his hedge fund’s performance history into his mutual fund’s historical data.

What I found intriguing about this data was that in the eight years from October 1, 2002 to September 30, 2010, BPFIX outperformed the S&P 500 in 31 of 33 down months — and was positive in 14 of those 33 down months.

Is this not exactly the kind of ride most investors are seeking?

The optimizer in me wants only the best possible long-term returns, which could be had elsewhere. But what stock market crashes teach most investors sooner or later (and in my case, it was quite late) is that one’s risk tolerance is not a fixed value, but rather heads in the direction of zero as the crisis turns and your stomach churns.

For that reason, I believe that long-short funds deserve serious consideration.

In fact, Morningstar’s very sharp analyst Nadia Papagiannis offered a bolder assessment. “It’s my personal opinion,” she told me in a phone interview, “that in 20 years everything’s going to be long-short funds.”

We can’t keeping having people’s portfolios blowing up — especially if they’re in or near retirement. What distinguished these funds is that they are more adept at managing risk.

Having discovered limits to my own risk tolerance, I am willing to reconsider my definition of what “optimizing” really means.

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