Despite lingering questions, last month’s “in-like-a-lion” routine was not as scary for long/short mutual funds
| Jun 7th, 2010 | Filed under: Performance, Analytics & Metrics, Today's Post | By: AAA Staff |
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In this recent post, we learned that long/short mutual funds have produced lackluster alphas, but that short positions still added positive alpha. This was particularly true, according to researchers, during times of market stress. Specifically, they found that short positions helped mitigate losses, but not enough to result in net gains within the portfolios.
To examine this conclusion, we had a closer look at the recent decline during the week of May 3rd through May 7th. What we found was proof of the importance of manager selection among equity long/short mutual funds.
The analysis uses a universe of equity long/short mutual funds listed in the Morningstar database – with the removal of market neutral, arbitrage and so-called “absolute return” funds (we could never figure out what exactly that meant anyway). While this filtering schema is a little blunt, the back-of-the-envelope analysis yielded some interesting food for thought.
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