Market-neutral managers have had as difficult a time beating their indexes over the past 18 months as long-only managers.
And, as with long-only managers, there was little uniformity of returns. Some were up in 1993 and down this year. Some underperformed in 1993 and are up so far in 1994. Others were able to beat their benchmarks both periods.
Market neutral matches long and short positions in the stock market. Such a strategy is designed to profit from a manager's insights as to which stocks are overvalued as well as those that are undervalued. Success depends on the value of the manager's insights.
"Generalizing in that category is very difficult," said Narayan Ramachandran, a managing director and investment strategist at RogersCasey, Darien, Conn. Perhaps one surprise for the long-short managers is that not all of them have done well this year, when the markets are down, he said.
As Alan J. Strassman, chairman of Martingale Asset Management, Boston, wrote in Pensions & In' June 27 issue: "We should expect just as much diversity of returns from managers of long-short portfolios as we get from managers of traditional long portfolios. They will not all have good and bad years simultaneously."
Mr. Strassman noted long-short strategies can be applied equally well to value or growth investment styles, which prosper at different times.
Jacobs Levy Equity Management, a Roseland, N.J., firm, had a relatively disappointing 1993 in its market-neutral portfolios but has rebounded so far in 1994. Its market neutral product was down 1.6% in 1993 but up 5.7% through June, said Bruce Jacobs, principal at Jacobs Levy.
Other market-neutral managers report strong performance in 1993 followed by a disappointing 1994 so far - for differing reasons.
Numeric Investors L.P., Cambridge, Mass., was up 14% to 16% in 1993, depending on the fee schedule, but is only "above water" through the first half of this year, according to Langdon Wheeler, president.
A market-neutral strategy, sometimes called a long-short manager, generally attempts to beat a cash index by a set amount. U.S. Treasury bills returned 1.58% for the first half of 1994 and 3.13% for calendar year 1993. The Standard & Poor's 500 Stock Index returned -3.39% and 10.09% for the same periods.
Independence Investment Associates, Boston, returned 16.3% in market neutral in 1993, while in the first half of 1994 it returned -3.27%, said Vincent Burns, senior vice president and principal. Independence equitizes its market-neutral portfolio by going long S&P 500 futures, resulting in a portfolio that will return the index, plus or minus the market-neutral strategy.
Likewise, State Street Research & Management Co., Boston, is down about 4% through June in its strategy, but was up about 20% in 1993, said Edward Finch, senior vice president.
Jacobs Levy had problems on some short positions resulting from its computer model, according to Donald W. Borneman, senior vice president-asset management, for Jacobs Levy client Consolidated Natural Gas Co., Pittsburgh. Mr. Jacobs, of Jacobs Levy, said the market behaved irrationally in 1993 in how it was pricing "good shorts." Hence, his firm, as well as pure short sellers, underperformed. But Jacobs Levy's long-only portfolios outperformed, noted Mr. Borneman. Since then, Jacobs Levy's market-neutral strategy returned 5.7% between Jan. 1 and July 31, he said.
But State Street Research had problems on the short side; it was burned by some strategic moves involving the management of some of the companies in which it had short positions, Mr. Finch said. For example, a strong short candidate, Syntex Corp., ended up being bought out by a European company that paid more than the company was worth to get its distribution network, he said.
Numeric's returns have been less than expected recently because of unexpected macroeconomic shocks, such as the rapid climb in interest rates this year, Mr. Wheeler said. And while Numeric uses computer models in its selection of stocks to buy and sell short, Numeric considers itself more of a momentum style of investor. Jacobs Levy seeks to exploit inefficiencies measured by several dimensions of the market, as does Independence.
State Street Research uses investment analysts for its process.
Martingale Asset Management, Boston, beat its benchmark by about three percentage points last year, and is just below its benchmark this year, said William Jacques, chief investment officer.
He said 1993 was a normal year for Martingale, and "we're within striking distance" for this year.
First Quadrant Corp., Pasadena, Calif., also beat its T-bill benchmark in 1993 and so far this year, returning 9.8% in 1993 and 2.7% through Aug. 12, according to John Dorian, managing director.
Overall returns also vary, with market-neutral strategies resulting in returns ranging from 7.7% to -5.9% through June this year and 23% to -6.3% last year among managers tracked by Centurion Trust Co., a manager-of-managers firm in Chicago. Centurion tracks alternative managers, and doesn't include all managers offering market neutral.
Likewise, RogersCasey shows a range for market-neutral managers it tracks from 7% to -5% for the first six months of 1994 and 11% to -5% for 1993.
While other money managers also said blips have shown up in their respective processes, pension fund clients seem satisfied with the strategy so far, but need to evaluate it from a long-term perspective.
"We're not disappointed," but it's too early to tell if the decision to invest with a market-neutral strategy is a success, said Mark Schwanbeck, assistant treasurer at Times Mirror Co., New York. Times Mirror put a market-neutral strategy in place last fall with J.P. Morgan Investment Management, New York. Since then, the strategy has beaten its S&P 500 benchmark, but with a little more volatility, Mr. Schwanbeck said.
Similarly, Mr. Borneman of Consolidated Gas said its approximately $45 million market-neutral portfolio has served its purpose well, adding diversification - through short selling - and provided a good risk-adjusted return. But Mr. Borneman also said the portfolio has not been in place long enough to properly evaluate it.
Unisys Corp., Bluebell, Pa., has had good success with the strategy since 1989, although 1992 and 1993 were underperforming years, according to Charles A. Service, corporate director capital management and trust investments.
But this year, its two market neutral managers - Jacobs Levy and Twin Capital Management, Pittsburgh - have outperformed their indexes, he said. Unisys has about $125 million total in market neutral. No matter what the returns have been short term, market-neutral managers stressed the importance of looking at long-term results - and of not ignoring their differences.
RogersCasey's Mr. Ramachandran said choppy markets seen this year may be contributing to return inconsistencies for market-neutral managers. With no single theme dominating the markets for very long, it might be tougher to earn money in such strategies, even if the overall market is declining, he said.
Controlling and knowing risk when matching long and short positions are also considered to be key. Mr. Burns said there may be long-short managers that aren't aware of the risks they're taking. "Some (managers) don't realize how their risk is changing," as market conditions change, he said.