Research house Zenith has awarded the highest rating of highly recommended to five funds after completing its review of the Australian long/short sector.
In all, a total of 47 domestic managers participating in the sector were included in the examination, with 17 being rated. The sample was split into two categories based on strategy. One group contained the funds using a 130/30 long/short approach, with the other encompassing funds using a flexible long/short method.
The 130/30 managers typically short sell a number of securities and use the proceeds to take long positions in a range of other stocks. The net market exposure using this technique ends up at 100 per cent.
Zenith found that approach allowed managers to construct a more high-conviction portfolio, but also employed more gearing that had the potential to exacerbate losses.
Three funds within this group received the highly recommended ratings: the Regal Australian Long Short Equity Fund, Ausbil Investment Trust - Active Extension Fund and Arnhem Long Short Australian Equity Fund.
The group using the flexible approach was internally split into funds that were long biased and funds that adjusted their market positions depending on the investment landscape at the time.
One fund manager from each sub-group got the top rank of highly recommended. In the managers showing long bias, the Matthews Velocity Fund was the leader of the pack and the Optimal Australia Absolute Trust received the top grade in the variable sub-group.
