Alpha Hunters: Bringing Long-Short Equity to the Masses

Alex Gurvich is one of the founders of Rockledge Group, which was founded in 2004. Before that, he worked at GE Capital, the investment division of General Electric, managing a technology venture-capital portfolio. The other founders of Rockledge developed and tested the basic strategy while at CIGNA before 2004.

Rockledge’s first product was a traditional long-only sector allocation fund called Rockledge L2, and this has a track record going back to April 2005. This Rockledge L2 strategy has a total return of 87.1% from inception through January 2012. This is quite impressive against the S&P 500, which has returned 11.2%.

In 2008, Rockledge expanded its offering by developing a sector alpha product with a long-short strategy. This product uses the L2 strategy and adds a short component, selling the S&P 500, maintaining a dollar neutral position. Sector alpha has gained 20.2% since its inception in July 2008 through January 2012, versus the S&P which was up 2.5% in the same period.

By 2010, Rockledge wanted to expand and it started “looking out for a different mode of distribution.” They started looking in the ETF space.

Jim Mitchell joined them in 2010, leaving Tremont Capital, where he had been a managing director, responsible among other matters, for developing an insurance dedicated product. There, he was also building a seeding program, which is how he was introduced to Gurvich’s team.

Their new product for Rockledge Group (specifically for Rockledge Advisors) is an ETF that uses the Sector Scoring and Allocation Methodology (SectorSAM), an actively managed and sector selection and rotation analysis, and is accordingly known as the SectorSAM ETF (SSAM). The fund holds equal amounts long and short and is as a result dollar neutral.

AAA: Congratulations on the launch of your new product.

Rockledge: We were at a conference last week, and heard reactions to our launch. The new product is getting a good reception. It has been written up in several periodicals, including Barron’s. We’re bringing long/short equity as a strategy to those who aren’t high net worth or accredited investors. Although today there are some long/short strategies available through mutual funds, there isn’t much long-short available in ETF format. But that seems to be changing. For the most part the strategy we employ, a long-short equity fund, is still the domain of high net worth individuals and large institutions. There are few hedged strategies available for the many.

AAA: Is this exclusively a retail product, or do you anticipate institutions expressing an interest as well?

Rockledge: Though SectorSAM is at least initially aimed at the retail market, it follows precisely the strategy that institutions such as CalPERS or General Motors would seek out. SSAM brings this long-short absolute return alternative strategy to the public. It does what they now aren’t able to do without dealing with limited partnerships or lock-ups.

AAA: One common line of argument in the asset-management world is that actively managed funds don’t justify the fees involved, and that especially at the retail level most people are better off buying into a passively-managed index fund. How do you react to that?

Rockledge: A lot of times the traditional long-only manager has underperformed the broad market. Whether it is a retail investor or an institution you are seeing in recent years a swing away from active managers toward the passive indexes. This can mean, in practice, long-only passive index mutual funds, or passively managed index ETFs. But our approach is about active management through asset allocation specifically sector rotation. It isn’t about stock picking. Research has shown that stock picking is the point where the investor can lose out. Asset allocation is where a manager can add value.

Rockledge’s track record for sector allocation goes back to 2005 and has easily outperformed the S&P. We are comfortable with our process for identifying potential sector outperformance based on our past 7 years.

AAA: From your launch on January 12 until Friday, January 27, SSAM has lagged behind the S&P. Closing Friday, S&P was up 1.6 percent, SSAM by 1.2 percent. Why is that so?

Rockledge: For the month of January SSAM was up 1.3%, and that was only since the launch on January 12. You have to break down that figure into the results from our long holdings on the one hand, our shorts on the other, to make sense of it. When you look at our long positions, they are up 2.59 percent for half of January. Our shorts are down 1.10. Our beta long is 1.25. Our beta short is .87. It’s all about consistent performance regardless of the type of market. This is not a tracking fund. We’re not necessarily going to go as quickly as the market when it is headed up. But we will still be headed up even when the S&P is down.

AAA: Pimco, which is obviously a huge and very visible institution, is getting into the active ETF business in March. What do you think they’re up to?

Rockledge: I think they’re recognizing that the ETF has an operational advantage over the mutual fund, that it is the investment vehicle of choice going forward. There are several reasons why this so is. For example, when you sit down to buy into a mutual fund for yourself or your family, you have to go through a long document. For an ETF, you make a telephone call to your broker.

Second, ETFs are fully transparent and have instant liquidity.

Third, and also part of what I think Pimco sees, there’s the value of cutting out intermediaries. There is no middle man between Pimco and the potential buyers of its new active ETF. They go from a BtoB distribution to a BtoC distribution and probably net the same fee at the end.

AAA: Do you have any further products in the pipeline?

Rockledge: The short answer is ‘yes.’ We’re trying to understand the best product to put out there. Our sector scoring process would work on international sectors for example. We see ourselves in the vanguard of the market bringing alternative strategies to the market in the ETF wrapper and our next product will keep us there. There are lots of ways we could go but we are focusing out attention on a successful beginning for SSAM. Just as a list of possibilities: we could move into the mid-cap or small cap areas, and we could look at international equities; or we could rotate country by country rather than sector by sector. Our methodology can apply at different levels.

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One Comment

  1. Mark
    February 20, 2012 at 1:17 am

    This is perhaps the most substantive article I’ve seen yet (out of roughly half a dozen) profiling this new ETF. I especially appreciated the data on the track record of their L2 sector allocation algorithm (in another context that is). It would be nice however if one could be pointed to some independent listing of this cited performance record. For individual/retail investors unfamiliar with the murky world of hedge funds and how to document past performance, a link to where to find that would be nice! But thanks for this article in any event. It’s an intriguing new product.

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