A new, interesting and expensive fund popped up on my radar from something I saw on Twitter, yes I am still calling it Twitter.
The Invenomic Institutional Fund (BIVIX/BIVRX) is a long/short equity fund that has been around since mid-2017. The fund's literature goes out of its way to note that it only positions in domestic stocks. It has a 5 Star rating from Morningstar and in its five full year plus two partials, it has had two huge up years. It was up 61% in 2021 and in 2022 it was up 50%. All the other years it was up ranging from 3+% to 16% except for this year, it is down 5.97% through the end of April.
As I try to understand what the fund is attempting to do, I come to the conclusion it wants to be a high beta, out-performer. That is what it has been doing for the most part. To keep this consistent with past blog posts, I would say high beta outperformance is the expectation it is setting.
A different long/short equity fund that I don't think I've mentioned before is the AQR Long/Short Equity Fund (QLEIX). It is also a 5 Star fund that is very expensive. It's been around a little longer but I believe it sets a different expectation. Its performance is far less volatile as closer to low volatility equity exposure or high performing absolute return but with a CAGR that is less than BIVIX and a standard deviation that is less than BIVIX.
Arbitrage strategies are typically long/short one way or another, I use merger arbitrage for clients and the expectation I think being set there is a horizontal line on the chart that tilts upwards. Whatever is going on in the world, my expectation is that it will be up a little with very little volatility.
The fourth type of long/short to mention is the AGFiQ US Market Neutral Anti-Beta ETF (BTAL) which is a client and personal holding. Its expectation is that it will have a negative correlation to the broad US indexes.
All four are long/short but all do different things. BIVIX and QLEIX are kind of close but nothing like the other two.
In the same period, the Merger Fund (MERIX) which is a client and personal holding compounded at 3.63% with a standard deviation of 3.10%. They all look very different and do different things in a portfolio. BTAL lowers correlation very reliably. MERIX lowers volatility very reliably. The following tracks BTAL, QLEIX and BIVIX weighted at 20% with the other 80% in the Vanguard S&P 500 ETF (VOO).
The most interesting thing is that despite BIVIX being much more volatile than QLEIX, a 20% allocation to each has the same standard deviation when paired with 80% VOO. The BTAL blend is as advertised in terms of lowering the correlation.
I've never used long/short to try to add outperformance or volatility to a portfolio. QLEIX has had a couple of serious down years which would be ok for BTAL but there is somehow less reliability, in how I view things, in trying to outperform with a long/short strategy.
The bigger take is about expectations, understanding what a potential holding should do. It may not do it all the time but is the performance reliable enough to hold on to? If something should be a horizontal like that tilts upward, does it actually do that? If so, how frequently? QLEIX helped in the decline of 2022 but not in the decline in 2018. Does that matter? That is up to the end user. BIVIX creates a good first impression to be sure but no plans for now to do anything other than try to learn more about it.
A quick note is that shorting stocks is expensive which contributes to why these funds appear to be expensive.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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