Long-Short Funds

I just saw an interesting post on levels of competence in investing. In this passive alpha section of my portfolio I am being an evaluator - the second level of competence. I think I am getting better at it. The third level applies to my trading. That is an ongoing struggle and I don't think I have proved yet that I am a consistent performer. But I have a good idea of what is needed there.

On to today's passive alpha investments. I have three long-short funds: Hussman Strategic Growth, TFS Market Neutral, and Platinum Capital (HSGFX, TFSMX, PMC.AX). Each of these has very different strategies and so they make sense as complementary investments. I've discussed the first two before, for example here and here. Hussman is long individual stocks and then hedges using derivatives based on his research on past market conditions. The fund does very well in bear markets and quite well in strong bull markets but seems to underperform in moderate bull markets as we have seen recently. Hussman is good at picking stocks. His stock picks have outperformed the index. I am concerned though that economic conditions may have changed and he may be too bearish. He argues that the share of profits in GDP must return to its historic levels. I am not so sure. It is possible there has been a permanent change in the economy. I don't know for sure. I wouldn't make a bet on this either way at this point.

The TFS Market Neutral Fund is much smaller and mainly invests in smaller cap stocks. It is always long and short stocks and doesn't alter its hedging in response to market conditions. Recent returns have been much better than at Hussman. But the track record is much shorter. Both these mutual funds are invested in US stock markets.

Platinum Capital is a closed-end fund that is invested in stock markets globally. They are also always short some stocks but have a long bias. They change the weighting they give to different countries based on their assessment of global macroeconomic conditions. They also actively hedge foreign currencies. But interestingly they don't just hedge foreign exposures back into Australian Dollars. They may hedge into Yen, or Euros or any other currency. So this fund is also a bet on currencies. As Platinum Capital is a listed fund its price relative to NAV varies. But unlike most closed-end funds it usually trades at a significant premium to NAV. I believe this is due to the fact that the fund has considerable undistributed profits, which under the Australian taxation system have attached "franking credits". In Australia closed-end funds pay taxes (unlike the in the U.S.). When they pay out dividends, those dividends have credits for those taxes paid. Platinum Capital reports the franking balance. I maintain a spreadsheet that regresses the share price on NAV and the franking balance and tells me when PMC is under or over-valued. I buy when the stock is undervalued and sell some when it is overvalued. This has significantly boosted my returns over a buy and hold strategy. BTW, trading closed end funds is one of TFS's strategies too. Because of all my trading in and out it's hard to come up with an accurate estimate of my rate of return. Also I invested in 2001-2 and then again in April 2004. In the recent period it's been about 20% annualized. Platinum Capital does charge a performance fee with a hurdle of beating the MSCI World Index. Like Hussman, they performed better in the past. The MSCI has returned 20% p.a. over the last two years. I matched it by trading PMC, the fund itself has not performed as well.