A pair of long short managers discuss investments that aren't 100% married to equity success
Quantitative easing has not been a friend to Michael Aronstein, Chief Investment Officer at Marketfield Asset Management. Along with Joel Greenblatt, Columbia University professor and portfolio manager Gotham Asset Management, the pair discussed a long short investing strategy in light of what Aronstein called “the most aggressive monetary experiment in the history of central banking. Government bureaucracy should not be in the business of experimenting.”
Aronstein says QE has been much better for equities
Aronstein’s performance shows the difficulty of fighting the Fed. “We responded to QE3 in 2012 thinking the fed had gone too far,” he said. “QE has been much better news on equity side than for other assets,” which have found difficulty in the face of QE. Recent performance has been difficult, but the fund is prepared for crisis performance to a certain extent.
Like all good hedge fund managers, Aronstein has his drawdown periods and moments he shines. Looking back on the 2008 crisis, his fund was down just 13 percent due to its shorting of stocks as well as buying. Here, too, he is tough on himself. “We should have made money in 2008,” he notes, saying they had the right call – short financials such as AIG and the large banks heading into the 2008 derivatives implosion. “We were short all the right stocks, but covered our American International Group Inc (NYSE:AIG) and big bank shorts too early. The fund lost over 13 percent in 2008, much better than broad-based ETFs and other “conservative” products that were down 1/3 to 2/3 of their value during the same period of time.
Greenblatt reveals components of his long short strategy
For his part, Greenblatt revealed components of his long short strategy, saying that his fund is typically 50 percent to 60 percent long. Many long short hedge funds have larger long exposures, often times upwards of 70 to 80 percent. What about the fees? Greenblatt notes that when looking in 2009 for investors, very few Hedge funds were (or are today) worth 2/20, so made fees lower for the hedge fund vehicle.
Where does the fund’s alpha come from? Investing in the correct general stock market sector or does it come from stock picking. “It comes from stock picking,” he said with a note of certainty. He believes that if investors do good valuation analysis, the market will agree with you…just there is no guarantee of when and 90% of time it could take several years for the market to agree.
When considering volatility, a consistent topic brought up at the conference, Greenblatt appeared to weigh in on a hot topic of debate. “People don’t mind volatile returns, they just don’t like downside volatility.” Certain algorithmic traders and academics have long argued that the Sharpe Ratio is an improper measure of risk because it treats upside (positive) deviation with the same formula weight as downside (negative) deviation.
When considering value, Greenblatt provides the example of housing, saying the value of a house should be relative to how much money can be extracted from rent should drive the over value / under value question. When investing in stocks, Greenblatt has a determination of value and scales out of a position as the spread between his valuation and the stock price closes and he appears to have absolute faith in his strategy. “When valuations aren’t running in our direction we don’t say our models aren’t working and we don’t change them,” he said.
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