Do You Need More Long/Short?

On the heels of yesterday's post about robustness, a lot of the things that have tended to be sources of portfolio resilience didn't do that today. Gold was down. Managed futures ETFs were down. Defense contractors were down. Yieldy staples were down. 

Client holdings BTAL and CBOE were up along with a couple of other things but on a relative basis it was a rough day.

A reader on Twitter questioned whether any of what we talk about matters.

That is fair. The picture is a bit much but it's funny. These are tendencies we talk about with varying degrees of reliability but no assurances of infallibility. Meb Faber has a Tweet out there somewhere to the effect of setting your strategy and then just letting it work. The tendencies are reliable enough for me that I am very comfortable letting them work. 

Moving on, I saw an ad for the relatively new WisdomTree Efficient Long/Short Equity Fund (WTLS). It's a 90/90 leveraged fund with 90% in the S&P 500 and 90% in a long biased long/short strategy. In related fund news, the Unlimited Equity Long/Short ETF (HFEQ), similar to Unlimited Managed Futures ETF, targets twice the volatility of regular long short. That doesn't necessarily mean twice the return but that could frequently be the result. 

It's a very short look back because of WTLS' inception date. QLEIX is a long biased fund from AQR that does not seek to double the volatility. The numbers tell the story in terms of volatility. FWIW, on Tuesday WTLS was down 2.4%, HFEQ was down 3.5% and QLEIX was down 0.48%. That makes sense given what each fund is targeting.

For QLEIX's lifetime, it has trailed SPY by 133 basis points annualized with a much lower volatility. The table shows differentiation, sometimes meaningful differentiation, but as a long biased long/short, it could be a substitute for core equity exposure. 

Putting 60% into one fund like this is a non-starter for me but for blogging purposes we can play around with long biased long/short. Portfolio 1 is pretty oddball. USAF is the Nouriel Roubini ETF that we have looked at a few times. It's been fixed income-ish for most of its history looking a lot like AGG but has gotten a pop in the face of the recent chaos. 

The respective 20% allocations to QLEIX and HFEQ should be close to 60% in equities. The exposures to AQMIX and client/personal holding MERIX can happen because of the capital efficiency from HFEQ. The same could be said of WTLS.

This is an interesting idea. There are all kinds of different long/short strategies. The three funds all fall into the same category as opposed to short biased like client/personal holding BTAL or market neutral like arbitrage funds. 

Similar to managed futures, anything beyond a small slice to long biased long/short should probably have multiple managers.

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