05/15/2013

Dow 15,000 Is Boon for Long-Only Strategies

As long/short equity funds continue to underperform the stock market, increasing numbers of managers and investors alike are betting on long-only vehicles.

Take Impala Asset Management, a New Canaan, Conn., fund shop run by former Soros Fund Management executive Robert Bishop. The $2.1 billion firm has managed a long-only book on behalf of one investor since 2006, but just last month began marketing a commingled fund dubbed Impala Waterbuck. It’s expected to have $150 million under management by yearend.

Meanwhile, hedge fund giant Viking Global has seen a surge of interest in its $4.6 billion Viking Long Fund — so much so that chief executive Andreas Halvorsen last month stopped accepting new investors. The fund has delivered a 21% average annual return since 2009, compared to 12.7% for its benchmark, the MSCI World Index.

“The long side of the portfolio is what clients are demanding,” said an investment professional who researches hedge funds for a $1.6 billion endowment. “They just want those longs.”

It’s no wonder, considering the drubbing long/short equity managers have taken for sub-par returns at a time when stocks are trading at historic highs. Last year, for example, the HFRI Equity Hedge (Total) Index gained 7.5%, versus 16% for the S&P 500. Through April 30 of this year, the hedge fund index was up just 5.4%, compared to 12.7% for the S&P.

This isn’t the first time hedge fund operators and investors have embraced long-only vehicles amid a market run-up. Starting around 2003, managers including Steve Mandel of Lone Pine Capital, Lee Ainslie of Maverick Capital and Paul Ruddock of Landsdowne Partners all jumped on the long-only bandwagon.

The Dow Jones Industrial Average closed above the 15,000 milestone for the first time on May 8 — putting an exclamation point on a four-year stock market rally. For investors in long/short vehicles, it’s been four years of seeing their investments trail the performance of long-only strategies.

From the managers’ standpoint, long-only funds offer a low-cost way to deliver higher returns. The vehicles usually can be launched without adding investment staffers, and the absence of hedging allows them to fully capture the upside of a bull market. The flip side, of course, is that long-only portfolios have no downside protection, so the returns tend to be more volatile. Often, the question for investors is whether it’s worth paying hedge fund firms performance fees of 10-20% when mutual funds are available at a fraction of the cost.

“If they [managers] can justify those fees by generating higher alpha, there’s a place for it,” one investor said. “Consultants like it, especially if you have a client looking to put money with hedge fund managers as part of their equity program.”

Viking Long Fund charges a 20% performance fee on gains exceeding its benchmark, on top of a 1.5% management fee. The terms for Impala’s long-only vehicle haven’t been made public, but the manager has had little trouble raising capital. The fund, quietly launched last year in response to investor demand, currently has $65 million under management. But the pace of subscriptions is expected to accelerate.

Impala Waterbuck gained 11.6% during the first quarter, versus 10.6% for the S&P 500. The portfolio has beaten the index for five of the past seven years.

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