First-half volatility caught many investors unaware – including managers of alternative strategies that could've benefited most
Investors were taken for a roller-coaster ride in the first half of 2020 as the massive coronavirus-driven declinegave way to stomach-churning market volatility. Those wild movements were a prime opportunity for long-short fund managers to win big – but not all could pass the COVID-19 acid test.
Based on data from Morningstar, just 30 out of 99 funds that could bet on or against stocks logged gains in the first half of the year, reported the Wall Street Journal. There was a wide disparity between winners and losers, with the ProShares Long Online/Short Stores ETF registering a return of 48% over the 26 weeks ended on June 30, and the Pzena Long/Short Value fund losing 28%.
In theory, had the teams behind those funds been able to sell borrowed shares of stocks that lost ground in late February, or buy stocks ahead of the recovery that followed starting on March 23, they would’ve been able to make a healthy profit.
But as noted by Todd Rosenbluth, head of ETF and mutual-fund research at investment intelligence firm CFRA, events unfolded too quickly for many long-short fund managers to capitalize. “Investors had to be great at timing the market to capture both sides of the trade,” he told the Journal.
The fact that returns were so widely dispersed, he added, comes down to the fact that managers of such funds typically face few restrictions on how they are to invest money.
Another complicating factor was how the pandemic created a performance gap between individual stocks that had been viewed as neck-and-neck competitors beforehand. One example noted by Jack Ablin, chief investment officer and founding partner at Cresset Capital, was the Netflix-Disney matchup.
“[They] went into 2020 as head-to-head rivals in the entertainment business, and coronavirus drove a wedge between the two as the latter had to close its theme parks,” Ablin said.
That, along with countless other examples, showed how COVID-19 reshaped the global economic landscape, and effectively upset the previous balance of winners and losers that fund managers had positioned themselves for.
There were some bright spots and stand-outs, including the Neuberger Berman Long Short Fund, which hoovered up US$824 million in new assets in H1 2020. But with the majority of managers seemingly caught on the back foot, most investors lost confidence in hedge funds, and the long-short sector suffered an overall exodus of capital.
