The Good, the Bad & the Ugly

Equity Market Neutral funds come in a variety of flavours and strategic pursuits. Some are dsciplined, other nebulous by design. But like footprints in the snow, one cannot hide from the trail left by one's returns. This could be good or bad, depending upon whether the results in fact, corroborate one's pursuit, or unveil it's charlatan roots for all to see. The past month's events provides a fascinating peep into this world, with a guided tour by yours-truly.


First is the BMNIX, the Rosenberg Laudus small-cap value fund that plunged so spectacularly and sympathetically with Tyhke, GS, AQR, and Renaissance. BMNIX is unabashedly skewed towards the smaller-cap and the value on the long side, presumably versus things with less value on the short side. Rosenberg has always had a healthy respect for momentum, so, potentially, their pari-passu was NOT on the short-side, but on the long. Interestingly, they meaningfully recouped most of the extreme dislocation drop, probably as a result of higher turnover, and the fact that value-oriented pari-passu small-cap were as illiquid on the up-bounce as they were on the puke. Bravo!

Next we have the approx $2bn JP Morgan Market Neutral Fund. Yeeeehaw! OK so he's recovered most (down only 2% mtd), but an 11% unleveraged peak-to-trough drawdown with probably 400 to 500 names per side. Ooooooch! I cannot infer what exposures caused that, but my guess is he must have had excess resource and value exposure on the long side coupled with the pari-passu short portfolio that WENT-UP when the market was going south.


Another dubious horse from the same JPM stable is the Highbridge US Market Neutral Fund. Though apparently different managers, and different holdings (this one is seemingly more concentrated and less diverse) it too suffered what was a 10% unleveraged drawdown. And again while nothing jumps out on the long side, without detailed analysis, one might assume that it was the ill-behaved short-portfolio that was the culprit. Maybe it was THEIR fault, for Highbridge admitted deleveraging, and the pari-passu would of course have hit their sister-short portfolios. The de-risking also perhaps accounts for why they only recovered less than half their loss, for if they cut (even some), they would have locked in losses at distressed levels indeed.



The next rung down on the ladder, we have TFS MArket Neutral Fund, who got slammed on the order of 13.5% peak-to-trough unleveraged. Ouch! Perusing his holdings, the only thing I can say is that his 150 or so long portfolio positions resembles everyone else (and the market) less than perhaps any other manager. They are certainly NOT "value" (portfolio PE of 65x), and are skewed to the tech and growth areas so their yearning for "Capital Appreciation" must be founded upon hope and prayer. Judging from performance, this market neutral iconoclasm should not be worn as a badge of courage. The horrid time must have been exacerbated by high pari-passu on the short side.


Near the bottom, we have the Robeco Boston Partners Market Neutral Fund. I found this interesting because they've historically done a nice job of unearthing attractive value+growth on the long side that encouraged Robeco to "buy the firm". They are more fundamental than their brethren, but that apparently doesn't guarantee success. I would suggest their approach is more an over/under valuation relative to more sophisticated sector/market/stock-level valuation, for their returns regress upon this factor rather highly. And notably, the level of relative over/under valuation has indeed been a poorer predictor of returns since mid-Q2 than most other simple value or price-reversion factors. But -12% from their highs and nearly -5% ytd, one must ask why these valuation tails are not more effective. The answer probably lies in the misfourtune of the over-shorted short side which should (and will) go down and underperform, but probably not until existing shorts puke more and unwind positions diminishing short-interest to levels where actually selling will take the price down.

Finally, at the bottom, we have a fund hilariously called "THE GERONIMO FUND", who in sympathy with its moniker, has also taken a grand leap into the abyss. In attempting to mimic HFR index hedge fund performance, the managers Mssrs. Prokupek & Krause, have managed to flame-out spectacularly, thereby insuring a return to higher education or a career change into Colorado's hospitality industry.