Global and Asian long/short funds have delivered on downside protection whilst still participating materially in market upswings over the past 14 years, according to the latest Global long/short sector review released by research house Zenith Investment Partners recently.
Over the 14 years assessed in the review the global and Asian long/short funds have produced upside capture ratios that are greater than downside capture ratios for 11 and 10 of the calendar years, respectively. Importantly, Zenith notes that the global long/short funds have not produced a downside capture ratio that is above 100% in any of the calendar years, reinforcing the strong downside protection capabilities of the funds. Simply speaking, a capture ratio measures in percentage terms the degree to which the upside or downside of an index is ‘captured’ by a sector or fund. For example, 75% downside capture means the sector fell 25% less than the relevant index
However, this has not been the case for Asian long/short funds, where the downside capture has exceeded 100% in three of the calendar year periods, and the year to date (end of August 2014). Based on the analysis conducted, Zenith believes the global and Asian long/short managers are utilising the flexibility and breadth afforded to them to generate attractive risk/return investments for investors.
For the 12 months ending 31 August 2014, the average return for Zenith rated global long/short managers (all categories) was 10.3% compared to 15.3% for the MSCI World Index in $A. Over the same period, the average net exposure for all managers was 83.1%. The best performing sub- category of managers was Asian long/short, with an average return of 14.2% compared to 15.4% for the MSCI World Asia ex-Japan in $A Index.
According to Rodney Sebire, Senior Investment Analyst at Zenith Investment Partners, “While the strong absolute numbers are pleasing, performance needs to be assessed in terms of each managers’ net equity exposure. We observed that managers tended to maintain a high net equity exposure, with some managers omitting to hold any short positions”. Sebire notes, “While the extended period of rising global equity markets has diminished the importance of market timing, the recent spike in volatility is expected to provide an opportunity for managers to demonstrate their timing skills”.
As part of the sector review, Zenith analysed the investor pay-off for investing in global long/short funds. Zenith believes these funds should provide investors with strong downside protection whilst also participating materially in market upswings. Based on the analysis conducted, both global and Asian long/short managers are utilising the flexibility and breadth afforded to them, to generate attractive returns for investors.
From an initial investment universe of 22 Global long/short funds, 16 were assigned a positive rating: 4 were rated “Highly Recommended”; 9 “Recommended”; and 3 were assigned an “Approved” rating.
