BusinessWeek – At first glance, long-short mutual funds seem like a good idea. They mimic various hedge fund strategies, aiming to rise when stocks fallâ€â€or at the very least, to lose much less ground.
The reality has been a little different, though. From July 1 through Sept. 14, the 53 funds tracked by Morningstar (MORN ) fell an average of 1.4%, vs. a 0.86% decline for the Standard & Poor’s 500-stock index. Even as the market has recovered a bit, some long-short funds are still getting clobbered. Among them: Geronimo Multi-Strategy Fund, down 9.75% since July 1.
What happened? In part, the funds were hit by the same forces that rocked hedge funds. Facing requests for redemptions, many hedge fund managers sold high-quality stocks that had fallen in price. To reduce their leverage, they also bought back stocks they’d sold short. With lots of funds in the same bind, that pushed up the prices of lower-quality issues. The effect: losses on both their long and short positions.
This is not the first time these funds have come up short. Over the past three years, in months when the S&P 500 has fallen by more than 1.5%, the group has barely managed to beat the market.
But even as the category has disappointed, a few funds have proven themselves. They have generally performed well in periods such as July and August, when other investments have notâ€â€a feat that has helped them shine over longer periods.
