The Zenith Australian Long/Short Equities Sector Report initially looked at 35 funds, of which 20 were not approved – either because they failed to pass through Zenith’s screening process or they decided not to participate.
That left 15 funds in Zenith’s long/short universe, of which nine were ‘active extension’ funds and six were ‘variable beta’ funds.
The active extension funds returned 19.2 per cent in the year to March 2013, while variable beta funds returned 12 per cent (the S&P/ASX Accumulation Index returned 19.2 per cent for the period).
But the long/short funds delivered the returns with less risk, as measured by standard deviation (9.3 per cent per annum versus 11.6 per cent per annum for the market).
Active extension funds typically have a 100 per cent net market exposure – for example, 130/30 long/short.
The resulting gross exposure of 160 per cent of the market means investors have access to more active management “without having to deploy more dollars”, but there is a higher risk of significant underperformance if the manager underperforms, according to Zenith.
Variable beta funds, on the other hand, use their ability to short the market to protect investors in falling markets.
During an event like the global financial crisis, a variable beta manager might have a long position of 90 per cent and a short position of 70 per cent – for a net exposure to the market of 20 per cent.
However, the gross exposure to the market for such funds is still 160 per cent, which means that investors are still subject to magnified risk associated with the manager’s stock calls, according to the Zenith report.
Zenith investment analyst Christopher Huang, who co-authored the report, said it was important for investors to be mindful of gross exposure as well as net exposure to the market.
While it is “commonly held” that long/short carry the same level of risk as the market – or even less than the market – investors shouldn’t forget to take into account manager risk, said Mr Huang.
When it comes to including long/short strategies in an investment portfolio, Mr Huang said Zenith recommended that investors include a mix of both active extension and variable beta funds.
Of the nine active extension funds reviewed by Zenith, four received a ‘highly recommended’ rating and five were ‘recommended’.
Of the six variable beta funds, two were highly recommended and four were recommended.
