Joel Chernoff's Feb. 21, page one article, "Market-neutral managers stung," was an excellent overview of the 1999 performance of long-short equity market-neutral managers. However, the first thing to think about when trying to determine what's happened to long-short equity is to remember that, like every other investment strategy, the long-short equity universe is actually comprised of several different and distinct investment styles.
On a broad basis, we at Collins Associates classify long-short equity into three main substyles: fundamental security analysis; statistical pairs; and multifactor quantitative models that generally use regression analysis to take advantage of anomalies. Based on this stratification, it becomes much easier to see what happened in 1999. Specifically, it is one style of long-short equity investing that underperformed, the style that relies on a quantitative, multifactor regression approach. The general equity market's overall disregard for valuation and focus on momentum (further intensified by an almost myopic focus on an increasingly narrow segment of the market) in particular hurt performance for those managers as their models specifically look for undervalued stocks to buy and to sell those found to be overvalued.
It's not unusual for any one investing style to go in and out of favor. What is unusual in the world of institutional investing is that rather than diversifying across long-short equity managers of different styles (much as a long-only portfolio is diversified across growth/value and large-/small-cap managers), many investors have had the misfortune of diversifying across managers with the same investment style, that of the regression-based, multifactor model approach. As these tend to be the largest and best-known managers, that's not surprising. For many investors, one style has mistakenly become the universe. Thus when the managers that follow a quantitative factor model strategy underperform, as in 1999, it appears that the entire universe has done poorly.
Taking a broader view of long-short equity, recent returns don't look so bad. Using returns from the Collins Associates alternative investment manager database for the 12 months ending Dec. 31, the quantitative multifactor model managers as a group lost 1.6%, net of all fees. The other two long-short styles -- fundamental analysis and statistical pairs -- together gained 10.5% (net of all fees), much better than the general perception of long-short equity based primarily on the returns of the quantitative factor managers.
One final point. It is only by seeing a broad cross-section of the long-short equity universe that this diversity of style becomes apparent. The institutional investment community therefore should not rely just on the managers that come to them to truly understand this universe. Only by interviewing many, many managers is it possible to clearly discern the different investment styles and understand their place within the universe (and then within the broader market-neutral universe). And this total picture of the universe has to be understood before the hard work of analyzing individual managers can begin.
Judith F. Posnikoff
Newport Beach, Calif.
It was with profound disappointment that we did not see our performance listed in the Pensions & Investments Performance Evaluation Reports, PIPER, in the Nov. 29 issue.
We are sure it was a simple oversight and look forward to having our performance included in future rankings.
For the record our figures for Emerald Capital Management's Dynamic Select Portfolio are as follows: third-quarter return, -3.2%; one-year return, 70.9%.
founder and president
Emerald Capital Management