Long/short path to nirvana

Long/shortfunds are the darling buds of hedge funds as their strategies are “impossible to beat” and offer investors an investment “nirvana” in comparison to the strategies of other hedge funds, according to a European-based hedge fund manager.

Speaking at a round-table conference in Sydney last week, Belgium-based fund manager Kedge Capital’s chief investment officer Stan Beckers sang the praises of long-short funds to those present.

Beckers argued that investing in long/short funds provided a greater opportunity set through the widened range of stocks available to invest in, an improved risk/reward profile and a low correlation with traditional asset classes.

He also claimed that the benefits outweighed any significant disadvantages such as the limited track records of many long/short managers, a lack of transparency, a risk level that is difficult to quantify and a lack of commonly accepted benchmarks or indices.

Beckers also commented that ill-defined investment mandates have enabled hedge fund managers to “do whatever they like”, and the industry has responded by creating fund-of-funds to “dilute the problems associated with individual managers”.

“If hedge funds were well managed, the fund-of-funds industry should not exist,” Beckers said.

The other members of the WestAM panel, which includedTowers Perrinhead of investment research Dennis Sams,MLC Investment Managementchief investment officer Chris Condon,Mercer Investment Consultingprincipal Christopher Andrews,Watson Wyatthead of investment consulting David Neal,Russell Investment Managementchief investment officer Peter Gunning, andvan Eyk Researchhead of asset consulting John Peterson, were much more wary in their endorsement of long/short strategies.

There was consensus that careful manager selection was as important, if not more so, than in long-only investments — with Sams referring to this as the “bottom line” in terms of successful investing — as well as a recognition of the fact that long/short investing requires an entirely different skill set.

Condon likened shorting to speculation, saying: “Long/ short activity is fine if you are a speculator and you have skill, but not if an investor has no skill and may end up paying for dubious skill.” Andrews was similarly suspicious: “All investing involves skill but shorting amplifies the exposure. Why would you do that if you didn’t have to?”