Long-Short Funds?

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johndcraig

Long-Short Funds?

Post by johndcraig »

How safe are long-short funds as compared to say T Bills? Does is make sense to put a portion of the “safe” investments into, for example, the Hussman Strategic Growth fund rather than in TIPS or Short Term Treasuries? The objective of the fund is to outperform the treasuries in good markets (fell a bit short last year, but still positive), and, of course, to far outperform the market should there be a correction or crash (the Hussman fund is fully hedged with options). Is it worth it to risk a small underperformance as compared to treasuries in order to protect the downside?

John
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Re: Long-Short Funds?

Post by xenial »

johndcraig wrote:How safe are long-short funds as compared to say T Bills?
Not very. Long-short funds invest in equities, after all. Worse yet, the manager's long stock picks could go down, while his short stock picks go up: a double whammy!

Best wishes,
Ken
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Post by Bounca »

I hope you get some responses. I have been considering a long-short fund at %5 of my AA. I’m looking at Gateway GATEX among others. They look to be a ‘good’ diversifier in weathering through storms.
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Post by xenial »

Bounca wrote:I’m looking at Gateway GATEX among others.
Because performance depends upon both the manager's long and short stock picks, there is likely to be wide dispersion in results among the various long-short funds. The funds with good past performance will attract attention and assets. Unless you believe in persistent outperformance by "star" active managers, you're better off sticking with T Bills for your diversification needs.

Best wishes,
Ken
Topic Author
johndcraig

Post by johndcraig »

Too general

I think my questions were too general and that it might be better to focus on Hussman or Gateway. Hussman is 100% hedged at this time and I think Gateway is also. Hussman uses two factors to determine how much to hedge and one is current valuations (it doesn’t go beyond 100% hedged). Granted the ER is high at 1.25%, but the fund does seem to be pretty good insurance for those such as me who are presently bearish, and maybe it's not too unrealistic to hope for enough alpha to cover the additional expense.

John
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Post by stratton »

What are the "attributes" of a long short fund? If it's to not go down much in a bear market and not expect all that much upside in bull market then using a fund Wellesley ought to be pretty safe. 40% stock / 60% bonds can have that effect.

:->

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Post by RiskAverse »

johndcraig wrote:Too general

I think my questions were too general and that it might be better to focus on Hussman or Gateway. Hussman is 100% hedged at this time and I think Gateway is also. Hussman uses two factors to determine how much to hedge and one is current valuations (it doesn’t go beyond 100% hedged). Granted the ER is high at 1.25%, but the fund does seem to be pretty good insurance for those such as me who are presently bearish, and maybe it's not too unrealistic to hope for enough alpha to cover the additional expense.

John
If you are bearish, then you should implment that view yourself by raising cash or else using the various short ETFs

If you like Hussman's fund go for it. Why do you need our approval?
Topic Author
johndcraig

Post by johndcraig »

Opinions appreciated

Of course I’m not looking for approval, but I wouldn’t mind some opinions. My thinking is that if I benchmark a Hussman investment against T Bills, I shouldn’t be too far off if the market continues to do well. The performance history seems to support the reasonableness of the T Bill benchmark in up markets. Also, if those such as Bernstein are right about expected returns on equity, equity returns may not exceed T Bills by more than a percent or so. So if we continue to have up markets, the downside might be something slightly lower than T Bills, or it might return something slightly higher, possibly approaching the lower equity estimates. The real upside benefit occurs in the event of a market correction or crash.

John
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Post by xenial »

Why not just invest in T Bills at zero expense ratio? They provide great downside protection. Unless you think Hussman is the next Buffett, it doesn't seem wise to pay high expenses and take on individual stock risk.

Best wishes,
Ken
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keep it simple

Post by hollowcave2 »

If you're bearish or nervous about a downturn, adjust your asset allocation. There's no comparison between the hedge fund and T-bills: T-bills are the safer way to go with the lowest expenses. Trying to reduce risk with your hedge fund complicates matters and you may not achieve your goal anyway.

Steve
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johndcraig

Post by johndcraig »

Summary of Hussman Fund approach

The Hussman fund invests in 130 stocks classified as LB by M*. Clearly an active investment since the fund picks the stocks, but very conservative because fully hedged. For those not familiar with the fund, here is Hussman’s explanation. Any other thoughts?
By December 31,2003, the Fund had achieved a total return of 84.29% since its July 24, 2000 inception (an average annual return of19.47%) versus a loss of -19.95% in the S&P 500 (an average annual return of -6.27%).

More recently, however, the Fund has achieved only single-digit annual gains. During the three-year period from December 31, 2003 through December 31, 2006, the Strategic Growth Fund achieved an overall total return of 15.07% (an average annual return of 4.79%) versus an overall total return of 34.70% (an average annual return of 10.43%) for the S&P 500 Index.

This three-year performance gap is actually a modest disparity for a hedged investment strategy. With the market extremely overdue for a material correction, it would take little market difficulty to put the Fund even with the S&P 500 for the period since 2003.

To illustrate, suppose that the Fund remains fully-hedged during a one-year bear market decline. Given the prevailing yield of 5% on short-term Treasury bills, and assuming the Fund’s stock holdings (after expenses) perform no better or worse than the indices it uses to hedge, the Fund would also achieve a total return of about 5%.

How deep would the bear market loss in the S&P 500 then have to be in order to close the performance gap that has emerged since 2003? The calculation is:
1 – 1.05 x 1.1507 / 1.3470 = -10.30%.
We evidently do not require much of a bear market.

Of course, if the Fund’s stock investments were to perform better than the indices we use to hedge, the performance of the Fund would be positively affected. If the Fund’s stock investments were to lose substantially more n a bear market decline than the indices we use to hedge, or if the Fund as not fully hedged during such a decline, the performance of the Fund would be negatively affected.
John
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Post by larryswedroe »

to me these funds make absolutely no sense whatsover.

First, you have the issue of active management adding value.

Second, you have high expenses raising hurdles

Third, they are usually 100% stocks net, and if not and they have ability to shift then you have no control of your asset allocation--not good idea

Fourth, for a well diversified portfolio you are now likely paying fees to be long a stock (in one fund) and fees to be short the same stock in the long-short fund. And likely to be double long the same stock since might own in another fund.

Fifth, you have the expense of going short. Note that all these long-short funds and hedge funds that short stocks have not only of course increased market efficiency but they have raised the demand to borrow stock, raising the costs of doing so, which again raises the hurdles for active managers.

Another product meant to be sold and never bought IMO
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johndcraig

Post by johndcraig »

Larry

Thanks for the reply.

The Hussman fund has about 3 billion long in diversified LB shares. It fully hedges this through put and call options on the indexes (S%P500 and Russell 2000). It expects that when fully hedged it should be able to at least match the T bill returns. Should the market take a dive, it expects to earn considerably more than the T bill returns. In the three years following the 2000 bubble burst it averaged about 16%pa.

So it seems to me that the downside is that the fund cannot match T bills and the market stays up for many years. In this case it might earn 1-2% less than T bill – not good but not the end of the world. Of course it might also exceed the T bill return during that period. It would seem that the probabilities fall in a fairly narrow range.

I am bearish, and if the market does take a dive, then the fund should do considerably better than T bills. I don’t really know how to evaluate the upside range under these circumstances.

All considered, there may be some extra costs, but it is a conservative investment. Maybe a little worse than T bill returns in high market times, but a whole lot better if the market takes a dive.

And yes, the reason I started this thread was to see if there is convincing evidence to talk me out of this.

John
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GATEWAY

Post by pkcrafter »

Bounca
I have been considering a long-short fund at %5 of my AA. I’m looking at Gateway GATEX among others.
I looked at this fund back in the 90s and determined it wasn't worth the cost. First of all, for a fund like to this to have any real impact, you will need a lot more than 5%. One would only buy such a fund to provide some protection is big down markets. It up markets, it's just a big weight dragging things down.

Looking at the numbers compared to VG Equity Index (VEIPX), we find GATEX with returns in 2001 and 2002 of minus 16.5%. VEIPX lost 18% in those two years.


GATEX returns for 3, 5, and 10 years are 8.9%, 9.4% and 6.7%
VEIPX returns for 3, 5, and 10 years are 15%, 14.2% and 9%

For this particular comparison and time period, clearly, GATEX didn't provide much downside protection and it lost a lot of ground in good market conditions. Of course, the next bear market could cause VEIPX to look worse, but using a diversifed portfolio with a reasonable AA will always be a good choice.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Post by stratton »

For this particular comparison and time period, clearly, GATEX didn't provide much downside protection and it lost a lot of ground in good market conditions.
GATEX is the cheapest, but that Hussman fund mentioned earlier has a better track record during the 2001 bear market. It actually went up.

The problem is the fund started in 2001 so it could have been an incubator fund that did well, and had no funds in it, then was hyped like mad to get funds after the bear market.

Paul
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Post by Russell »

Hi John --

I'm a fan of Hussmans, so probably will not do much to talk you out of it. But I'm a little curious as to your characterization of the fund in the original post:
john wrote:The objective of the fund is to outperform the treasuries in good markets (fell a bit short last year, but still positive), and, of course, to far outperform the market should there be a correction or crash
While you are of course welcome to use treasuries as a benchmark (especially when the fund is hedged), I don't believe treasuries have much to do with this fund's actual objectives. I believe the stated objective is to outperform the market over a full cycle, while limiting the downside risk....

When Hussman considers conditions to be favorable, he will remove all of his hedges (and possibly even leverage up to 150% market exposure). In unfavorable conditions he will hedge away some or all his exposure to the general markets, generally using options on the indices.

Unfortunately, we're 10 years into Alan Greenspan's "irrational exuberance" -- and as a result, I don't believe Hussman has ever (since his fund opened) been happy with valuations. He has occasionally smiled upon his measures of "market action" and lifted some of the hedges. Right now he is fully hedged -- and moreover, has constructed his hedges in such a way that the fund has a bit of a negative bias -- it will generally drop on up market days and rise on down market days.

Anyway, if I have some time to ponder, I'll try to put together my list of what I consider to be the potential upsides and downsides to this fund.
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Topic Author
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Post by johndcraig »

Russell, good points

I am ready to shift some equities to fixed, and I am considering this fund, as it is today, as a partial substitute for T bills. I expect it to be fully hedged until a market drop, which could be tomorrow or several years from now. My question is how likely is it that the fund will return less than T bills. If there is little downside as compared to T bills, but the upside on a market drop, then it may not be a bad substitute for the T bills.

I understand that if and when valuations and market conditions change the fund will no longer be fully hedged, but, as I said before, I don’t expect that to happen unless there is a sizeable drop in the market. I can reevaluate at that time.

Any additional input will be most appreciated.

John
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Post by Wagnerjb »

Stratton said:
The problem is the fund started in 2001 so it could have been an incubator fund that did well, and had no funds in it, then was hyped like mad to get funds after the bear market.
Exactly.

In June 2002, this fund had only $173 million in assets. However after the lucky streak his fund was hyped and ballooned to $2,816 million in June 2006.

This is a very sad case of performance chasing by investors. You cannot blame Hussman himself...he is just trying to make a fast buck, and has done very well. But for every lucky investor who was in this fund for the hot times, there have been maybe 20 other guys who got in too late and have suffered while the market has soared.

Sad story of performance chasing.

Best wishes.
Andy
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Post by stratton »

What I meant by "incubator" was start seven or eight funds with $10 to $20 million each and different strategies. If one has a home run, hype it to the max and close the rest out. Survivership at its worst!

In this case I have no idea if they did this, but your comment about performance chasing is right on. I wouldn't invest in a long/short fund unless the manager had a track record through a market cycle including a bear market.

Admitedly the Hussman fund does have a good looking track record, but I'm kind of dubious of these kind of funds. I'd rather put the long/short funds into something like Wellesley or straight treasuries/TIPS.

Paul
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Re: GATEWAY

Post by floydguy »

Looking at the numbers compared to VG Equity Index (VEIPX), we find GATEX with returns in 2001 and 2002 of minus 16.5%. VEIPX lost 18% in those two years.

Gateway's return in '01 was -3.5 and in '02 it was -4.9 so it did provide some downside protection.

FWIW, I have a small allocation to Gateway as an alternative to a bond fund. My preference is to do this rather than having a larger bond allocation. So I am comparing the performance to a bond fund not equity.

Should bonds become a better investment I may return to a higher percentage in bonds. I certainly tend to be a lot more "active" than most on this board, though.

My thought is: give it a shot. See what happens it probably won't have a dramatic impact on your portfolio one way or the other. The only downside is you will lose out in the next ER contest.

Andrew
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Short-Bias Hedge Fund Managers: Masochists or Yeomen?

Post by stratton »

Here's the ultimate "disaster" fund. They want bear markets.

Short-Bias Hedge Fund Managers: Masochists or Yeomen?

Our current bull market must be annoying. Morale of the story is handicapping Mr. Market can be an exercise in futility.

Paul
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Post by HockeyMike35 »

How safe are long-short funds as compared to say T Bills? Does is make sense to put a portion of the “safe” investments into, for example, the Hussman Strategic Growth fund rather than in TIPS or Short Term Treasuries?
This fund in no way compares to T Bills. It is a high cost high risk fund that depends on the managers ability to predict bear and bull markets.
Granted the ER is high at 1.25%, but the fund does seem to be pretty good insurance for those such as me who are presently bearish,
The performance of this fund or appropriateness for individual investors has nothing to do with whether or the the investor feels bearish or bullish. It's returns will be the same whatever the investor feels.
My thinking is that if I benchmark a Hussman investment against T Bills,


Again this is a highly inappropriate benchmark. The risk in this fund is far greater then T Bills.
So it seems to me that the downside is that the fund cannot match T bills and the market stays up for many years. In this case it might earn 1-2% less than T bill – not good but not the end of the world. Of course it might also exceed the T bill return during that period. It would seem that the probabilities fall in a fairly narrow range.
This is not a conservative investment. You are underestimating the downside. Since the funds strategy changes it is not always fully hedged. It is completely dependent on the managers ability to time the market.
When Hussman considers conditions to be favorable, he will remove all of his hedges (and possibly even leverage up to 150% market exposure).
As Russell points out above, the fund can use 150% leverage. This makes the downside very real and in no way corresponds to the risk profile of treasuries.
I understand that if and when valuations and market conditions change the fund will no longer be fully hedged, but, as I said before, I don’t expect that to happen unless there is a sizeable drop in the market.
What is your basis for this expectation? I am not sure how he values the market but valuation metrics change all the time without a sizable drop in the market. Take a look at the last 5 years as most valuation metrics have declined while the market continues to advance.

Good Luck,

Mike
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Post by johndcraig »

Andy, not performance chasing

There might be reasons not to like this type of fund, but performance chasing isn’t one of them. Suppose it was a pure bear fund. It would have done very well post bubble, but would people flock to it because it did? They would only if they continued to believe that the market was due for a downturn and decided to bet against it. That’s simply not the definition of performance chasing.

Not too dissimilar from some who call international investing performance chasing. If I invest in, say, the UK, I may be accused of performance chasing, and if someone from the UK invests in the US they may be accused of same. OTOH investing in your own country is not considered performance chasing – go figure.

Russell: how’s your upside/downside list coming? :?

John
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Post by Russell »

Russell: how’s your upside/downside list coming?
Sadly (well, not for me :) ), I'm skipping town for 5 days and probably not gonna get it to you before I leave -- my apologies!
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johncraig

Post by larryswedroe »

IMO there is significantly better way to deal with the issue you are cocerned about

simply lower your equity allocation and tilt more to small and value, especially value.

Then you don't have all the negatives of the long-short type fund. And you earn returns in more tax efficient manner, and you control asset allocation, etc
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Post by Wagnerjb »

Andy, not performance chasing

There might be reasons not to like this type of fund, but performance chasing isn’t one of them. Suppose it was a pure bear fund. It would have done very well post bubble, but would people flock to it because it did? They would only if they continued to believe that the market was due for a downturn and decided to bet against it. That’s simply not the definition of performance chasing.
I didn't say that I don't like this fund....I said I don't like how performance chasers piled into it and got hurt.

You are right that these are separate issues. A high-cost opaque fund is a problem by itself, totally separate from performance chasing. Heck, some people even chase (asset class) performance using low-cost passive funds.

The sad part is that many people who invested in this fund have no real clue what Hussman is doing. He mentions exotic options strategies that are undoubtedly beyond 99% of the people in his fund. In this sense, he is the equivalent of an insurance salesman peddling a very high cost and complicated investment that sounds great.....but ends up being quite a dud.

Best wishes.
Andy
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johndcraig

Post by johndcraig »

Larry

I’m aware of your strategy, and it makes sense to me. A more extreme form of your strategy is Taleb’s barbell strategy. Both strategies protect most of the assets on the downside and invest more aggressively a smaller portion of the portfolio.

In a sense the Hussman approach is similar (if in fact the downside risk is minimal when fully hedged). I am hoping to get a better feel for upsides and downsides, and am very interested in what Russell may come up with. The simple facts that it has a relatively high ER and is somewhat active don’t convince me that Hussman is necessarily a bad strategy.

John
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Post by larryswedroe »

john craig

I should have added that I would avoid any fund that uses puts and calls strategies--like covered call writing (which I cover in my book on alternative investments). There are more efficient ways --especially from tax perspective--to get achieve same risk reduction objective

IMO these are all funds that are sold and should never be bought
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OK, OK!! Here's my comments!

Post by Russell »

A few comments for John, regarding using Hussman as a market-neutral fund....

1) First, be very cognizant that this is not a dedicated market-neutral fund.

As we discussed above, it can seek market exposure of between 0 and 150%. Right now, it actually acts like a fund that is net short, because the hedges are constructed in a way that the fund can be considered fully hedged PLUS an additional bear vertical that will gain value on a market drop. I recently threw a regression at the first quarter returns and got a (statistically significant) negative beta of about -0.2.

2) To the extent that it is a market-neutral fund, it is completely a bet on the performance of the manager.

If you make the null hypothesis that the manager will neither add nor subtract value versus the market, then you will be left with a (somewhat noisy and somewhat expensive) t-bill fund. You would expect to get the t-bill rate minus expenses (~1.14%) minus trading/impact costs (~0.64%, see http://www.hussmanfunds.com/html/trancost.htm). Of course, the tax-treatment should be somewhat better than t-bills, so you might want to add that back in....

If you have some other fund managers that you would like to make a bet on, you can (of course) build your own market-neutral version of their funds. For example, if you wanted to make a Grantham-like bet on quality, you might buy $24000 of JENSX and (synthetically) sell $24000 of IWM (a R2K etf).

3) If you just want a market-neutral fund, you are probably overpaying Dr. Hussman.

A lot of what you are shelling out a management fee of one percent a year for is his prudent (and proprietary) approach to managing market risk -- deciding when it is reasonable to accept market risk versus simply accepting t-bill-like returns. For a timely example, how likely is it that the market will outperform t-bills in a rising interest rate environment with high PEs on record earnings and superwide profit margins? It's about probability distributions rather than predictions. Just because I know how likely it is I'll roll a seven at the craps table doesn't mean I know what will happen this time. But I do know what ought to happen over the long haul. To quote last week's commentary"This is a full cycle, law of averages, repeated game, central limit theorem type of process."

4) Although better than a money-market fund, the tax-management of this fund (or lack thereof) would probably be my major complaint.

Both the underlying equities and the hedges could easily be managed with more of an eye toward the tax man. Equities of course get favorable tax treatment (in the form of a lower cap-gains rate) when held for more than a year, and get reeeaaaally favorable treatment if you hold them until you die. And in fact options and futures get the same treatment (although they do come with expiration dates, you can certainly get LEAPS that expire more than 12 months down the road). Since this is a conservative fund and not a rapid-fire-in-and-out-of-the-market sort of fund, and especially since losses and gains in the stocks and the hedges should offset each other pretty well, it seems like this wouldn't be too hard to pull off.

However, Hussman goes the other way, which I find somewhat inexplicable: this is from the statement of due diligence (see http://www.hussmanfunds.com/pdf/diligence.pdf): "the Funds also make an attempt to avoid the accumulation of large, undistributed gains. In our view, excessive deferral of gains is hostile to newshareholders when those gains are ultimately paid." As nearly as I can tell, this is near nonsense -- and Hussman knows it. New shareholders will have a short-term loss that perfectly offsets any distributed gain. To the extent that a portion of the distributed gains is long-term, new shareholders will actually come out ahead -- and could sell their shares a couple months after buying and enjoy the tax benefits.

----

I don't know if that was worth the build-up you've given me -- if you have anything specific that you'd like addressed that I haven't, let me know and I'll do my best. The Hussman fund is rather unique, and Hussman seems to spend a lot of energy making sure people know exactly what they're getting. There's lots of good reading at his site....

Best, Russell

Note: If Prof Hussman is reading this and has any interest in putting together a tax-managed Strategic Growth fund, I am already in the area and would be happy to help out (at least in the summers :) ). Just let me know!!
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johndcraig

Post by johndcraig »

Thanks Russell

Here is my simplistic way of looking at the Hussman fund. Assume that I am bearish and decide that I want to back off my equity investments, say by 100k. I can sell equity and buy T Bills – very low cost and this will protect my 100k from the downside.

Another option is to instead buy the Hussman fund. I am convinced, based upon all that Hussman says, that he is not about to have a change of heart in the near term and depart from a fully hedged position. So now the downside is the extra cost as compared to T Bills, let’s say this is 1.5% or $1500/year.

What is the upside? First, there is the negative beta, which means that the fund will gain additional value if the market declines. Second there is the possibility of alpha from the stock picks. Here there appears to be a well diversified 130 stock portfolio that M* classifies as large blend. There is no reason to think that this portfolio should do worse than TSM, so at worst it is neutral. Now given the fact that the fund presently has a bearish view, there is a possibility, perhaps a good possibility, that the fund consists of stocks that are less susceptible to a market drop. Consider 2000 where a long value and short TSM would have reaped substantial benefits.

So the way I look at it, I am paying an additional 1500/year on 100k. If the market continues to climb, that is an extra cost. If the market declines, the question is whether the additional 1.5% costs will be outweighed by the negative beta and positive alpha. Probably so, IMO. The important points for a bear such as me are that my downside is measured in a relatively small known cost, but there appears to be good potential on the upside.

John
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Post by larryswedroe »

John
The problem IMO is that you can do this yourself much more efficiently simply by reducing risk of portfolio by lowering equity allocation, or lowering it and adding more tilt, or adding some CCF. All lot cheaper and more risk control than this alternative.
IMO this is really bad idea.
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johndcraig

Post by johndcraig »

Larry, as devil’s advocate…

Simply shifting to T Bills lowers cost and eliminates risk, but also eliminates upside potential in market decline.

Tilting adds some additional costs and more downside potential in a market decline.

CCF will add some additional costs, and may add downside but no upside (?) in market decline.

The difference as I see it is that the Hussman fund insures against the downside (for relatively small additional ER and transaction costs) but leaves open the possibility of a material upside in the event of a market decline. Of course, anyone who is bullish (or even neutral) on the market may consider this a bad bet.

John
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Post by larryswedroe »

John
I don't agree with any of your three points

First, I think you made mistake in first sentence--you must have meant eliminates upside potential in market rising. But that misses point that there is not only a risk reduction but also cost savings and you narrowed potential dispersion of returns. But that leads to second point

Second, tilting does add bit of cost, but you can significantly reduce the downside risk. I have shown tables on the historical results of tilting and reducing equity exposure. The results are dramatic. That to me is actually the main benefit of tilting.

Third, CCF is highly like to reduce downside risk. First, there has never been a single year when stocks, bonds and CCF all fell. Second 75% of time in bear markets CCF rises, and even including the loss years average gain is +23%. Clearly superior IMO to your strategy. BTW the average gain in negative bond years is 30%+. Costs go up but diversification return is high.

Also you control portfolio risk, with this guy you have no way of knowing what the hell you have. That is risk.

Fourth, the costs of your trade a huge, not small. Not only the costs of the fund, but the trading costs and the costs of shorting stocks. Often the OER is the lowest expense of active funds.

IMO this is a really bad trade. Just my opinion of course.
Topic Author
johndcraig

Post by johndcraig »

Larry, I think you missed my point
First, I think you made mistake in first sentence--you must have meant eliminates upside potential in market rising. But that misses point that there is not only a risk reduction but also cost savings and you narrowed potential dispersion of returns.


No, my main reason for considering Hussman is that it has upside potential in a declining market as compared to T Bills that have no upside potential in a declining market. For the three years following the 2000 bubble burst it averaged 16% returns. I know one day proves nothing, but yesterday it was up .5%.

Again, if this fund makes any sense (for us bears), it is because, as compared to T Bills, there is relatively little insurance cost in up markets that might be far outweighed in down markets.

John
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stratton
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Post by stratton »

Here's a list of how several publicly traded hedge funds did yesterday. See the "L/S Equity."

Code: Select all

DIAMX    -1.41%
SWEHX    -1.99
RYSTX    -2.09
HSGFX    -0.06
OLA      -2.21
DHG      -2.39
DEF      -2.14
A fund I've seen listed "long/short" is listed here as "covered call"

Code: Select all

GATEX    -0.98%
It looks like the only one that "worked" was HSGFX and GATEX was "sort of." I'd rather have Wellesley (-0.86%) for the same slot. Amatorizing its returns over a longer period of time will give about the same, or better, results.

Paul
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Post by larryswedroe »

John
Having potential for upside in declining market may also mean that there is downside potential in rising market--either that or you give up most of the upside, not small amount of upside

Again, I would urge you to stay away from these type funds. There are far more effective ways to control risk prudently.

With this guy you have no clue what your asset allocation is.And IMO that is terrible idea.
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johndcraig

Post by johndcraig »

Paul

You’ve got your numbers wrong. HSGFX was up .5% yesterday. As I recall, it has been up every day that the market has had a substantial decline. Unlike the other funds, it is 100% hedged and that explains the difference.

John
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stratton
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Post by stratton »

You’ve got your numbers wrong.
Not my numbers. The articles numbers.

Paul
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Russell
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Post by Russell »

John: You’ve got your numbers wrong.

Paul: Not my numbers. The articles numbers.
Fair enough. You got the article's numbers wrong. :)

Larry: Having potential for upside in declining market may also mean that there is downside potential in rising market--either that or you give up most of the upside, not small amount of upside.
I suppose we could go through all the permutations. If a fund is market-neutral then it basically looks like a noisy money-market fund. There is upside and downside potential in rising, falling and sideways markets. :P

Not to play psychologist (mathematicians tend to be notoriously bad social scientists), but I would imagine that that is the basic draw of such funds. If you've got a bearish outlook, sure, you could move to cash and sit on the sidelines. But then it feels like you're not doing anything. So you buy -- or put together your own -- market-neutral portfolio. Basically, you take beta out of the equation and bet on value v. growth, or small v. large, or high-quality v. low-quality or Hussman's picks v. the market. That way, you still have the dream of better than money-market performance....

And of course you are correct. You still have the issue of active management adding value. But at least in this case it's basically a quant fund with a firm sense of history. Could be worse....
Larry: With this guy you have no clue what your asset allocation is.

This is one of the most transparent funds in existence. If you so desire, you can go online every Monday morning (or Sunday night if you're up late enough :yawn ) and find out exactly what your asset allocation is -- how much market exposure you've got. So I'm not quite sure I see your objection on this point.
Larry: Fourth, the costs of your trade a huge, not small. Not only the costs of the fund, but the trading costs and the costs of shorting stocks. Often the OER is the lowest expense of active funds.
Another transparency issue -- the fund in question publishes not only it's OER but also estimates of all of the invisible expenses. See http://www.hussmanfunds.com/html/trancost.htm. And recall that, if done in a reasonable manner, you actually get paid interest for your hedging positions -- that is where the money market return in these noisy money market funds comes from.... :wink:

I better quit writing now -- I think I've run out of emoticons!! :oops:
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
Topic Author
johndcraig

Post by johndcraig »

Damn, Russell

You’ve figured me out :wink: . What fun are money market funds as compared to this? I’m willing to take the “big” gamble that I won’t lose too much after costs (as compared to mm funds) in up markets, and that I will win because of active management value added when the market tumbles. Of course as an admitted bear I expect the market to tumble -- or is that already happening?

John
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Post by larryswedroe »

Russell, so you want to spend your time and efforts let alone costs of transactions and taxes perhaps to adjust your other allocations everytime this guy changes? I suggest the transparency is nice but irrelevant. If you don't have better things to do with your life I suggest (only humoressly) that you get another life. More important things to focus on, like reading a good novel.
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Post by Russell »

Good evening --
larryswedroe wrote:Russell, so you want to spend your time and efforts let alone costs of transactions and taxes perhaps to adjust your other allocations everytime this guy changes?

That strikes me as a rather peculiar sugestion. :? By investing in a managed balanced or asset allocation fund you are handing over the reigns to someone else -- letting them deal with the worries of asset allocation. Why would I pay a manager to decide how much market exposure is prudent in today's conditions and then second guess them and adjust the rest of my portfolio to nullify their moves?
larryswedroe wrote:I suggest the transparency is nice but irrelevant.
Fair enough. At the time it seemed pertinent to your points concerning 1) costs and 2) not knowing your asset allocation.
larryswedroe wrote:More important things to focus on, like reading a good novel.
True - but the new Harry Potter doesn't come out in paperback until next summer! :(

Still overusing my emoticons.... :oops:
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
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Post by larryswedroe »

Russell

The point is you should not buy a managed balanced fund for just that reason--you lose control over the AA. And besides that there are all the usual arguments against using active management--no way known to find few winners ahead of time, successful past active management contains the seeds of its own destruction, added external costs (OER), adding internal costs,etc.

And then with a balanced fund unless it owns munis you hold one of the two risks in the wrong location
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johndcraig

Post by johndcraig »

Larry, a few final thoughts

All your points are the standard (and appropriate) warnings about actively managed funds. No disagreement on these generalities. But sometimes it is fun to think beyond the box. Any advantage of the H fund depends on the manager’s skill outweighing expenses. Not all managers are created equal, and I suggest that you read Hussman’s articles and explanations because he does have an interesting approach. Much of his analysis is similar to yours regarding valuations. Hussman could change to 150% long position tomorrow, but if you read his website you’ll understand why he won’t.

I am bearish, so my approach will vary from one who is not. I look to maximum downside which is the possibility of not matching T Bill returns. This is probably small and for me an acceptable insurance cost. I then look to the upside which arises in the event of a market decline. I am banking on the fund rising if the market declines. It has gone up in the past two days, and it increased considerably following the 2000 decline.

Maybe the gamble will work, but if not the downside is small and I‘ll chalk it up to experience. More fun than T Bills or MM funds.

John
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Post by Ariel »

This is a really interesting thread with John, Larry, Russell, et al. It brings out the interactions between a lot of issues such as asset allocation, market outlook, costs, emotions, reason, etc, etc.

I especially liked John's point that Swedroe's and Hussman's views have some overlap, except that while both of them emphasize the role of fundamental market valuations in constructing or adjusting an asset allocation, Hussman also emphasizes technical indicators as an supplement, which Larry rejects as a strategy for its costs (money and time) and unreliability, among other things.

fwiw, I personally have been in the past on the side of messing around too much with my portfolio (Hussman fund in the past, covered calls at present), but I am slowly moving toward a still-conservative portfolio of stocks and funds that requires less thought and attention. Whether I can completely go passive, or whether -- like Uncle Mick :D -- I'll always want some play investments, only time will tell!

Thanks, all, for your conflicting ideas and civil debate!
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
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Post by larryswedroe »

John Craig

Well the answer to me is very simple. I have been a trader and run large trading rooms. I have sat on IPCs of large public company and watched them try to find great managers--failing with great regularity.

Sure you might win, but IMO the evidence is overwhelming that efforts at TAA, which is all that this is, are highly unlikely to prove successful. One study found that out of 100 pension plans trying it (and you can be sure that they all hired smart guys like the one you are hiring) NOT ONE SINGLE one succeeded AFTER COSTS. Now monkeys (which are lot cheaper) would have almost surely done better throwing darts.

And as to the entertainment aspect. I have a different view. Investing was never meant to be entertaining. It is meant to be about giving you best chance of achieving your goals. Also, if you really need entertainment from the stock market you might think about getting another life (said with tongue in cheek).
Topic Author
johndcraig

Post by johndcraig »

Larry

You are still generalizing. I don’t disagree with your generalizations, but I do disagree with your conclusions in this specific instance.
Sure you might win, but IMO the evidence is overwhelming that efforts at TAA, which is all that this is, are highly unlikely to prove successful.
But as I have said, I am not treating this as a general investment in a TAA fund. Yes it is a TAA fund, but given present valuations, etc. it is committed to 100% hedging. Viewed in this way the downside is very small, as previously discussed, and maybe, just maybe, there will continue to be upside with market declines. Tiny risk, but maybe better than tiny rewards. If not, c’est la vie.

Your comments remind me of John Cleese’s golf ball commercial. “Golf is supposed to be difficult; it’s a Scottish game for goodness sake. It was never intended to be fun“.

John
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Post by RiskAverse »

johndcraig wrote:Thanks Russell

Here is my simplistic way of looking at the Hussman fund. Assume that I am bearish and decide that I want to back off my equity investments, say by 100k. I can sell equity and buy T Bills – very low cost and this will protect my 100k from the downside.

John
John if you like the fund, buy it!!!!

Don't waste your time trying to convince a bunch of people who don't believe in L/S or market timing funds that you are making a good choice.

If you think Hussman can add value, take a few points of your equity allocation and put it into Hussman's fund.

------

What I strongly advise you not to do though is to confuse anything but T-Bills for T-Bills.

Divide your portfolio into a risk-free bucket, and a risk bucket.

Within the RF bucket, you stick to TSY/Muni bonds. In the risk bucket you can do whatever you like. Owning passive total market index funds is probably your best choice, but its not the only choice.
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Rose colored glasses.

Post by Trebor »

John, you are seeking a higher return while thinking you are only assumming the risk of the short term treasury market. You see a free lunch. I think you are trying to be too clever by half.

For example, lets just think about your bull market case. You assume in a bull market you will earn the return of short term treasurys. Your fund actually has to earn more than short term rate to pay for 1.2 % expense ratio as well as the extra premiums and trading costs of the hedging strategy. Do you think the fund is able to do that without taking on more risk than the treaury market?

Are you a trader who wants to make a bet on a “bear” market or are you a risk averse investor who is worried about a bear market. If you are the former, use your insight to place a “bet” and make some money. Of course, one wonders why if you are sure enough to place the bet you need to pay a 1.2% expense ratio to do it. If you are the latter, then I think you are fooling yourself. If you must, place a bet by using money from the risky side of your asset allocation. Don’t use your money from your short term lower risk treasury side of the allocation. A tax advantage account is needed or the hill to climb is even steeper.

I know we see investing through a different lens.
You see a free lunch.
I see risk and reward being linked.
We each think the other is wearing the rose colored glasses.

I think the mistake you are making is not seeing the extra risk you are taking. This is no different than any other active timing strategy. You already know the arguments. Through my glasses, I don’t see a free lunch. I see a lot of risk. Good luck.

Trebor
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johndcraig

Post by johndcraig »

RiskAverse and Trebor

RA, the reason I write these posts is not to convince anyone of anything. I write these because I am testing an hypothesis that I would like others to challenge. I gave the reasons why I believe the Hussman fund might be a good choice (for a bear) and I am looking to others for reasons why it is not. Larry, as always, gives solid advice and opinions on these things, and it is most appreciated. You state your conclusion without supporting arguments.

Trebor. As I stated, I am a bear. That means I see the market prospects as more negative than positive. IMO the only realistic approach for a bear is to hedge his bets. Any drastic actions are subject to a very slippery slope, as is often discussed. Bogle, for example, says if market conditions are unfavorable one might want to cut back on equities, but no more than 15%; that is one way to hedge your bets. I am discussing another way to hedge bets with a partial shift of equities to the Hussman fund.

You make absolute statements regarding active investing. Few here actually believe in that absolute; for example many invest in funds such as BRSIX or active V funds. Hussman comes out ahead in an up market if the return from the diversified long investment in 130 large blend stocks outweighs the hedged position in the indexes by a T Bill return after expenses. The return from the hedged position must exceed the decline in the long position in a down market.

I suggest that anyone who gets this far and is considering Hussman should read the articles and publications on that website to see if they think that Hussman’s active management can prevail as described. For me, a very important point is that the cost for being wrong is very small, but based upon its track record, the upside might be greater. Despite what Larry says, sometimes it is fun to try something different, particularly if little damage is done if all goes wrong.

John
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