SSI is the most interesting story. John D. Gottfurcht became a stockbroker in 1969 and watched the Dow Jones industrial average fall from 960 to 690 in 1970. As the market went down, all of his clients lost money. He figured there had to be a better way to invest in the stock market, other than just picking the hot stocks. Mr. Gottfurcht and his friend Harry Amey (who died in 1987) wanted to come up with an investment strategy through which clients would make money whether the stock market went up or down.
They built a quantitative, multifactor computer model to measure the worth of undervalued and overvalued securities. Their strategy was to go long on undervalued stocks, while shorting the overvalued stocks. In addition to the quantitative model, they added a fundamental overlay strategy. The long-short equity market-neutral strategy was born.
"In 1974, (at the end of) our first year of using the strategy, in the middle of the bear market, we had a positive return of 17%," Mr. Gottfurcht said in a recent interview with Pensions & Investments. "We knew we had something special."
Over the last 30 years, the long-short equity strategy has averaged a 9% annualized return. The strategy's goal, said Mr. Gottfurcht, is to beat Treasury bill rates by three to four percentage points a year. And it has.
SSI now manages $1.25 billion in two market-neutral strategies: long-short equity and hedged convertible. Mr. Gottfurcht said the firm has deliberately kept the amount of money it manages relatively small "because market neutral has limitations on the amount of assets that can be managed effectively."
Amy Jo Gottfurcht, chairman and chief executive officer of the firm who is also married to Mr. Gottfurcht, said that several of the firm's clients use both strategies in combination, which is known as blended market neutral where half of the portfolio is long-short equity and the other half is hedged convertible. Still others use the company's market neutral strategies in conjunction with S&P 500 index futures to beat the S&P 500 benchmark, which is the portable alpha strategy.
The firm's newest strategy, the hedged convertible market neutral strategy structured in a hedge fund format that uses a modest amount of leverage, was started April 1, 2001.
The strategy was developed before the computer revolution, so Mr. Gottfurcht used a slide rule to do calculations and would get the monthly stock prices by going to the library and looking through back issues of the Wall Street Journal. General Electric Co. had a large mainframe computer that could be rented on a time-sharing basis. He and Mr. Amey would rent it between midnight and 5 a.m. because it was cheaper.
SSI's investment strategy held up through the most recent bear market. For the 3 1/2-year period ended June 30, the hedged convertible market neutral strategy had a compound annualized return of 9.67%, while 90-day T-bills had a compound annualized return of 3.51%
The long-short equity market neutral strategy had a compound annualized return for the same period of 6.71%. vs. the 90-day T-bill's 3.51% return, and the blended market neutral strategy had an 8.54% return for the same period. During that same time period the S&P 500 had a return of -9.79%.
The hedged convertible market neutral strategy structured in a hedge fund format has had a compound annualized return of 18.07% as of June 30, since inception.