The fund is a retail-oriented extension of the firm's 20-year track record managing institutional market-neutral strategies. It seeks to capture equity market gains while preventing against downside risks by strategically shorting stocks while offsetting those positions with long exposures.
The fund is managed by senior portfolio manager Terance Chen, who is also lead manager of the
JP Morgan Research Market Neutral Fund
. He spoke to
about the new fund and the marketplace it enters.
What are investors looking for and how are you hoping this new fund meets those needs, especially given the current, volatile backdrop?
You have yields at basically historic lows, so people are trying to stretch for some more returns because they are worth less than they were a few years ago and they would like to generate some higher investment returns over time. On the other hand, there is overall uncertainty about the economy, and there are a lot of reasons -- good reasons -- for people to be fearful of the market.
What we are trying to do is use our stock-picking expertise, on the long and short side, to provide investors with an equitylike return, but better downside protection -- one-third to one-half the volatility of the
, for example.
In order to do that, what we are doing is running a long-short equity strategy with lower net market exposure, or lower beta exposure, than what the traditional long-short or hedge fund strategies typically run at.
A lot of long-short strategies out there in the market historically run at 0.5 or 0.6 beta, in other words 50% or 60% net long in the market. While that worked very well during a bull market, it did not work so well in a bear market. If you do the math and the market is down 25% to 30% and you are 50% net long, you are 12% to 15% in the hole before you generate any positive or negative value from your stock picking.
With this strategy we are targeting more like 0.2 to 0.3 beta, net long 20% or 30% of the market, about 40% of what the other long-short strategies would have historically run at. That is a much more acceptable volatility, and the downside protection that people are looking for.
How does this fund differ from other market-neutral funds or a 130/30-type leveraging strategy?
The 130/30 strategies were a hot concept a few years ago. As a result of that, a lot of people who hadn't done shorting tried to jump into the fray, and I think they found out that it isn't as easy as it seems. There are issues specific with shorting and a lot of managers have traditionally focused only on stocks they wanted to buy, but not so much on stocks they didn't like or stocks they wanted to short. That is a big reason why 130/30 as a space did not do so well.
If you look at our firm, we've been doing long-short investing for a long time and we've had the same process in place since the mid-1980s. Since that time, we've always asked our analysts to rank every stock they cover in attractiveness, from top to bottom. It has been a very natural process for us to identify stocks we like the best as well as stocks we like the least.
It is basically what the quants do in terms of having rankings for every stock, but we are doing it in a fundamental research fashion, as opposed to a quantitative fashion. Fundamental managers have generally done better than quantitative managers over the last few years because it has been such a volatile environment. The fundamental manages have been more forward-looking in terms of company prospects and market trends, and been able to do relatively better.
I do view this new long-short strategy as an extension of the market neutral strategy, but with looser constraints and a little bit higher volatility and risk taking. For investors who are willing to tolerate a little more risk than a typical fixed-income product. I think they are getting a good tradeoff in terms of the excellent returns we could potentially generate from them.
Given that investors are conflicted and risk-averse, how are you pitching the fund to them, especially given the complexity of shorting strategies in the context of a mutual fund?
Our philosophy has never been trying to hit home runs in any given year. We don't have to outperform every year or every quarter. Nobody does that; it is not realistic. But we think if we can provide modest value added and then also protect investors on the downside, over time we are going to end up looking pretty good competitively.
If I told you that I could basically give you returns similar to the S&P -- maybe a little bit better, maybe a little bit worse -- but with only half or one-third of the volatility and much better downside protection, I don't know many retail investors who would not want a strategy like that.
What guides your decision-making?
Not only are we not trying to time the market, we are also not trying to make sector calls. We are going sector by sector looking for the best investment ideas.
What I'm doing is looking at the market and saying, "If I look within tech, do I see a good return potential between the best tech stocks versus the worst right now, or do I see more potential with the best energy stocks versus the worst energy stocks?"
You have to really differentiate between a good company versus a good stock. Just because we love management of a particular company, or we love their business model, or the competitive advantages that they have, we still look at the valuation. Sometimes you kind of have to go down a little bit on the quality side in order to find the value.
Any specific examples of this philosophy in action when it comes to the new fund?
is a company we've owned for a while. We like their management team and they have a strong franchise in both what people traditionally think of as well as having a network such as ESPN, one of the must-haves when you turn on your TV. They made a great acquisition recently with
and I think Disney has the perfect expertise to monetize that. On top of all that you have a company that, when we make our earnings projections for every stock we cover in the media sector, they actually appear attractive compared with other media companies.
On the opposite side of that -- and I don't want to talk about specific names -- you look at some of the video game companies. You have a business model issue because it is a hit-driven business, so you don't have something that is predictable. You can also have a slowdown in the hardware cycle, because nobody knows when the next machine is coming out. Then you also have competitive issues with social gaming and Facebook. They just look overvalued to us.
So we go long Disney and short on some of the video game companies. By doing this, we are trying to hedge out some of the beta exposure to the portfolio. Whether it is an up market or a down market, as long as you have a company like Disney outperforming the video game companies, we are going to make money either way.
--Written by Joe Mont in Boston.
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