The Little People Get Hedge Funds
What happens when small investors get cut in on exotic short-selling strategies?
by William baldwin
If the market’s Brexit tantrum has reminded you of the pain of volatility, you may be hunting for something magical on Wall Street: an investment that delivers most of the return from stocks but much less of the risk. Hedge funds, those private partnerships offered to a select crowd, try to accomplish this by mixing stock purchases with short sales. The theory is that in a rising market the carefully selected long positions race ahead; in a correction, profits on the short sales insulate the portfolio from the worst of the decline.
Now ordinary folk can get in on the action. An expanding collection of publicly traded mutual funds combine long and short positions in stocks. With these, you can get hedge-fund-like returns.
Important question: Do you really want hedge-fund-like returns? Take a look at them before signing up.
Morningstar counts 133 publicly offered funds in its “long-short equity” category, holding a combined $34 billion. Results: awful. The average return for the bunch has been 2% a year over the 36 months to June 30. You could have had 11.7% a year from a stock index fund.
Hedge-fund-like? Sure, if that’s any consolation. An index of equity hedge funds tracked by Hedge Fund Research shows a 3.1% annual return over three years, almost as bad as the return from the public long-short funds.
The question is why an ordinary saver would really need this stuff. For an answer we turned to Goldman Sachs, which oversees $112 billion of alternative assets (those being almost anything other than plain old stocks and bonds) and has 40 years of experience in the field.
Lawrence Restieri Jr., who helps market alternative investments at Goldman, says the idea is to get exposure to asset classes that are not closely correlated with the stock market. “Adding a return driver that behaves differently can help clients over time,” he says. “You don’t want the client, after an equity market crash, to sell all their equities and not get back in [before] the market recovers.”
Protecting investors from self- LONG-SHORT MUTUAL FUNDS