The Long and Short of Long-Short Funds

“It’s not deliberate,” he says. “We’ve spent decades trying to be experts at this particular niche in the market. As markets have gotten more developed and as investors have gotten more information, they’re able to look at different choices on the risk spectrum, and we’ve been getting a lot more notice. They’re looking for something that’s addressing a particular need in a portfolio that stocks, bonds and cash might not deliver.”

Buckius has been with Gateway Investment Advisers since 1999, one member of a three person management team. Before joining the Cincinnati-based firm, he worked in investment banking in New York and Baltimore on the options trading desk (hence the strategy). He’s got his CFA and an MBA from Loyola University. Even though he’s been with his current firm for 12 years, he’s still considered “the new guy,” an indication of the strong tenure and track record Gateway enjoys.

When asked what sets them apart, Buckius gets very specific.

“What we do is straightforward and consistently applied. We buy a portfolio of stocks that tracks the S&P 500 index. Rather than speculating on the market, we use that portfolio to build a risk management strategy that actively dials down the risk of that stock portfolio. To do that we use S&P 500 index options to generate cash flow and reduce volatility. We also use a portion of that cash flow to buy downside protection in the form of index put options. The combination of those three gives us an attractive risk profile and balances risk and return at a sensible level.”

Buckius repeats the “win by not losing” mantra, something high in demand from clients worried first and foremost about protecting the assets they have.

“The stock market is where growth is over the long term; unfortunately, it tends to be a pretty big roller coaster ride to get where you need to be with equity investing,” he says. “We focus on trying to get the benefits of investing in equities that grow in place of protection, but doing so with a lot less risk. We think solid, positive returns when markets are good are important, but we think it’s just as important to avoid those large losses that, unfortunately, seem to be happening with increased frequency.”

A standard question asked of all overlooked managers is where they’re finding alpha and good deals—the areas that really excite them. To this, Buckius throws a curve.

“We focus on a lot of different areas, but individual stocks or even the direction of the market isn’t one of them,” he says. “The bread and butter of our focus are on volatility. Market volatility is the sentiment that gets priced into the market. So it incorporates the big macro picture, what’s going on with the Fed, what’s going on in Europe, what’s going on with individual company earnings and also how people feel about that going forward. It’s certainly a sentiment type of an indicator, but it translates into the options market in a very real, very measurable and quantifiable way.”

To put it in lay terms, volatility is good, something of which they look for and take advantage. It’s a story that works well given the current economic and political environment. And, speaking of the latter, Buckius (like any good manager) is keeping a sharp eye.

“This is an interesting period in the market,” he says with obvious understatement. “There’s certainly a lot of fear out there; justifiably so. Are we entering a recession? What’s left for the Fed to try? Then there’s the big question mark of what’s going on in Europe. The VIX index (which is really the fear index) was well above 30 for a significant period. The flip side of that is that it seems that there’s cause for optimism, rightly or wrongly. It seems as though there’s a lot that central banks around the world are going to do in terms of some coordinated action to address the markets, liquidity, credit increases. As I said, we’re at an interesting inflection point. We’re very comfortable being a little more conservative, a little bit more hedged, which fits with our strategy overall. There’s always going to be something to worry about.”