Are Long/Short Funds The Solution?

Ulli Uncategorized 3 Comments

The investment world is scrambling to come up with new and improved products to ascertain the public does not lose confidence. I posted about actively managed ETFs and “new funds for the fearful” over the past couple of days.

Now Long/Short fund providers started to chime in by promoting the features of their products. I received one such mailing from Palantir Funds with the following comment:

In these turbulent times, it may be vital for you to have awareness and access to alternative investment strategies designed to work well through all market cycles. The Palantir Fund (PALIX) is such a vehicle. Regardless of market direction, the goal of the Palantir Fund is to make money every year. Using a Global All Cap Long/Short investment strategy, this no-load mutual fund is designed for use as a core holding in a well invested portfolio.

2009 continues to unfold as a year of volatile, emotion driven trading. Through this maelstrom, the Palantir Fund has been able to generate nicely positive returns. We have been able to add significant value over our benchmarks in all of the relevant time frames.

• Lipper ranks the Palantir Fund as the 8th best Long/Short fund over the last 12 months through May 31st (Ranking are calculated on the total returns based on NAV of the 93 funds in this category over the time period).

• Zacks Investment Research ranks the Palantir Fund “1 for Strong Buy”

I don’t think much of ranking agencies and much prefer to a look at a chart. Here’s a graph of PALIX plotted against the S&P; 500 as comparison:

This fund has only been around for about 1-1/2 years. What becomes very clear is that PALIX tracks the S&P; 500 pretty closely. While it did not drop as sharply during the 2008 market massacre, it nevertheless did not avoid the sell off.

If you are of the opinion that Long/Short funds are the savior during bear markets, you’d be dead wrong. As last year has shown, PALIX reduced portfolio damage somewhat, but not enough to make me comfortable owning this fund when the next down leg occurs, whenever that will be.

Portfolio damage in bear markets can only be controlled by being out of equities and on the sidelines (or possibly in bond funds) via a clearly defined entry and exit strategy. Long/Short funds have been around a long time, but they don’t seem to address that issue to make them a valid investment choice.

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Comments 3

  1. Ulli, what would you do about funds in a 529? I feel helpless since you can only change the allocation once a year!

    When I get some peace and quiet I will try your hedge strategy…thanks many times again for all this great info.


  2. Ulli,

    In all my 40 years of investing I have learned one thing that always seems to be true. In any major upmove most long diversified investment vehicles go up and during most major downmoves most diversified investment vehicles go down. What I learned from this is to pay much more attention to market direction than so much as to what to buy long or what bear investment to buy. I am also careful what to buy too, but market direction is where it is at.


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