Salvaging Long/Short

Adam Butler had a thought provoking mini-thread;

 

Long/short is kind of a catchall category because there can be quite a few different approaches that seek very different results. I am not familiar with the index he is citing but I take from his comments that funds in that index attempt to beat the market at all times. 

Long/short is easily accessible in ETFs and mutual funds but is the space worth pursuing? It's far too broad for a simple yes/no. 

I found several ETFs in this niche along with verbiage copied from their respective web pages.

Pro-Shares Large Cap Core Plus (CSM): Goes long 130% and short 30% "with the goal, but not guarantee, of incremental risk-adjusted outperformance as compared to the Universe." The universe appears to be the S&P 500, so it is trying to always outperform the S&P 500.

First Trust Long/Short Equity ETF (FTLS): The fund will seek to "systematically provide 'long' exposure to high quality earnings stocks and 'short' exposure to lower quality earnings stocks." There's also a graphic that says it tries to "seek equity like returns, seek to reduce risk and manage downside risk." I believe it is implying that it is attempting outperform the broad market-cap weight stock market but let me know if you see it otherwise. 

Changebridge Capital Long/Short Equity ETF (CBLS): It "seeks long-term capital appreciation while minimizing volatility. The fund also strives to generate positive alpha via both the long and short portfolios over the course of an entire investment cycle." Again, outperformance, alpha, in both directions. 

Here's how they did versus the S&P 500 for two years coming into 2022;

 

CBLS was obviously new in late 2020. It started out white hot and then tailed off at the end of 2021. CSM and FTLS each lagged but did so in different ways. CSM tracks closely but behind the S&P 500 while FTLS doesn't really look like the index that much. It did noticeably better in the 2020 Pandemic Crash and then lagged by a lot after that. Here's the bear market (so far) result;

 

CBLS again appears to be in its own world. CSM again tracks closely to the S&P 500 while FTLS, like early 2020, is down nowhere near as much. Obviously there is no way to know what these funds will do in the future but they do set some expectations. CSM tracks closely to the index. There are a couple of two-year windows in the previous decade where CSM did outperform the S&P 500 but not by much. FTLS was consistently far behind on the way up for the stock market and consistently ahead on the way down for the stock market. 

 

So now, this starts to get interesting. Who knows if it will continue to go down less but has done so several times. FTLS does go up with the broad market just less. The CAGR is close to 60/40, the yellow line, but avoids interest rate risk and worst year/max drawdown numbers are much better than the S&P 500 or 60/40. Not knowing where this post would end up, it is looking like FTLS could be something of a game over strategy. It is not a horizontal line that tilts upward type of game over though but a 6.66% CAGR in a 2% inflation world (pre-2022 of course) with that volatility profile will be compelling to some folks. 

Where I thought this post would go is toward talking about entirely different long/short strategies that don't seek to always outperform so I will just touch on them briefly. Merger arbitrage and convertible arbitrage are long/short but they are in the horizontal line that tilts up category. If those two are your top performing holds, then things aren't going well elsewhere. Client/personal holding AGFiQ US Market Neutral Anti-Beta Fund (BTAL) is generally designed to go up when stocks drop which is different than the other funds mentioned in this post. It's kind of a short/long fund if you will although there have been a couple of stretches since I bought it in 2018 where it has gone up when stocks go up. I would never expect BTAL to outperform in an uptrend the way I might hope CSM or CBLS would in an uptrend if I owned either one. 

So there are different slices within long/short; stock market proxy, market neutral and diversifier are more typical labels. FTLS could actually be a tool to manage portfolio volatility. I will try to follow up on this one.

I have no interest or intention of using any of the funds mentioned in this post personally or for clients other than BTAL which is a long time holding.