This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Few Funds Shine by Selling Short

Stocks in this article: MFEDX HEOAX GS TOL FXI AAPL IMAX

NEW YORK ( TheStreet) -- Seeking protection from rough markets, investors have been pouring into long-short mutual funds. According to Morningstar, inflows have totaled $5 billion in the past year. That's a big figure for a category with $25 billion in assets.

The long-short funds aim to be less volatile than normal equity funds. To accomplish the goal, managers hold stocks and typically put 20% to 50% of assets in short positions. The shorts represent bets that stocks will sink.

Most of the long-short managers have produced uninspiring results. Despite the short positions, the category lost 15.4% in the turmoil of 2008. During the past five years, the funds finished a bit in the red, while the S&P 500 returned 1.2% annually.

What's holding back the long-short funds? For starters, they are expensive, says Jeremy Radcliffe, managing director of Salient Partners, a wealth adviser in Houston. The average long-short fund charges an annual expense ratio of 2.0%. That's cheaper than a hedge fund, but double what many mutual funds charge.

In addition, it is difficult to pick profitable short positions. The portfolio managers typically try to increase the short positions when markets look hazardous. They aim to reduce shorts when stocks are rallying.

But all too often, managers get it wrong, says Radcliffe. They take big short positions near market troughs when it is too late to avoid losses. Then the shorts drag down results as stocks rebound.

"Most of the managers are not really adding any value," says Radcliffe. "You could get better returns by putting 50% of your assets in the S&P 500 and 50% in cash."

But a few long-short managers have delivered solid results, limiting losses in 2008 and recording solid long-term returns. Among the top choices is MainStay Marketfield (MFADX), which returned 8.5% annually during the past five years, outdoing 95% of peers. Portfolio manager Michael Aronstein studies economic trends and makes bold sector bets. Most often he has been on target.

Worried about mounting housing problems in 2007, he shorted Goldman Sachs (GS) and other financial stocks. That protected shareholders during the downturn. Then in 2009, Aronstein bought airlines and other cyclical stocks that came roaring back in the rally.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,660.80 +303.93 1.75%
S&P 500 2,045.65 +32.76 1.63%
NASDAQ 4,722.1450 +77.8330 1.68%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs