Shopping Cart -

Your cart is currently empty.
Upgrade to today
for only an extra Cxx.xx

You get:

plus This issue of xxxxxxxxxxx.
plus Instant access to the latest issue of 340+ of our top selling titles.
plus Unlimited access to 30000+ back issues
plus No contract or commitment. If you decide that PocketmagsPlus is not for you, you can cancel your monthly subscription online at any time. Auto-renews at €10,99 per month, unless cancelled.
Upgrade for €1.09
Then just €10,99 / month. Cancel anytime.
Learn more
Pocketmags Digital Magazines
IT
Pocketmags Digital Magazines
   You are currently viewing the Italy version of the site.
Would you like to switch to your local site?
Leggi ovunque Read anywhere
Modalità di pagamento Pocketmags Payment Types
Trusted site
A Pocketmags si ottiene
Fatturazione sicura
Ultime offerte
Web & App Reader
Regali
Loyalty Points

Rethinking Equity L/S Allocations For Retail Investors

How to solve poor performance, excessive fees and blow-up risk

The model for allocating to equity long/ short funds is broken. The mentality of most allocators is to chase the “hot dot” – that is, invest with a fund that performed well recently and hope the hot streak continues. This approach is based on the discredited assumption that allocators can easily identify which funds will perform well going forward. In addition, the risk inherent in individual equity long/short funds is widely misunderstood – the equivalent of conflating the risk of a single stock with a diversified index. The net result is a decade of disappointment among clients who expected.

The alternative (and, we argue, superior) approach is to reframe investing in equity long/short as a “category” allocation – akin to investing in a passive, diversified index at low cost rather than making concentrated bets on high fee, volatile individual constituents. In fact, the actual, live performance of a simple, factor-based replication portfolio we’ve managed since 2012 has outperformed 80-90% of individual funds on a risk-adjusted basis with low fees, daily liquidity and transparency – a package that, overall, should be far more compelling to any allocator seeking to include equity long/short strategies within a diversified portfolio.

The factor-based replication approach that we advocate is the culmination of ten years of research and provides a data-driven solution to the pitfalls experienced post-crisis by many investors in liquid alternatives products.

Why invest in equity long/short strategies?

Why invest in equity long/short in the first place? The simple reason is that an allocation to equity long/short can improve the risk-adjusted returns of a diversified portfolio. Since January 2000, ELS hedge funds outperformed global equities with far less risk (see Fig.1).

In a 60/40 portfolio, nearly 90% of portfolio risk comes from the equity allocation. The substitution of a 20% allocation to equity long/short from higher risk equities over this period of time would have improved the Sharpe ratio of a traditional portfolio by 24%.1 Granted, equity long/short strategies are expected to underperform during strong bull markets, but historically this has been offset by the protection of capital during bear markets. Today, in the ninth year of the second longest bull market in history, at an important inflection point in monetary policy, the case for equity long/short is stronger than it has been in years – provided the implementation avoids some of the pitfalls outlined below. From a client management perspective, a proactive allocation that preserves capital during the next crisis should prove to be highly valuable.

Special issues for retail investors

READ MORE
Purchase options below
Find the complete article and many more in this issue of -
If you own the issue, Login to read the full article now.