Long/Short Equity strategy expectations
- Thread starter digitalnomad
- Start date
So 5 million, minimum contribution, to underperform the benchmark?
M* is wrong. I won't trust M* anything other than traditional funds data.
SPX is not benchmark for Long/Short equity. AQR fact sheet says their benchmark is custom index of MSCI world index and T-Bill. They are using world equities and trying to lean slightly one way based on tactical allocation. They beat their benchmark over long period.
https://funds.aqr.com/our-funds/alternative-investment-funds/long-short-equity-fund
Another fund you can compare is Vanguard market neutral, which is also sector neutral. Their benchmark is T-bill only.
https://investor.vanguard.com/mutual-funds/profile/VMNFX
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I mentioned it mainly because of its recent massive fall from grace. A year ago, it had the highest 3 year Sharpe of any equities mutual fund that I could find (it was over 2 I think). Over the last year it has fallen 20%.
What looked like a genius fund ended up giving quite a bit back. 5 year performance is still beating its benchmark but last year was a nasty surprise for everyone in the AQR fund.
I guess there is a very broad spectrum in the Long/Short arena. If a portfolio is purely neutral, I can see how the T-Bill serves as a good benchmark. I also believe that a risk free portfolio doesn't exist, so in reality it would be foolish to invest in a Long/Short Equity fund, unless performance is 2X the T-Bill. Then you have Long/Short factor investing like this which appears to lean on one side versus the other. I use somewhat of a similar approach with a small allocation. Not very exciting, but definitely scalable.
https://www.blackrock.com/investing...r-commentary/andrews-angle/long-short-factors
https://www.blackrock.com/investing...r-commentary/andrews-angle/long-short-factors
From your link:
"Unconstrained long-short strategies seek to eliminate market exposure by targeting a particular level of risk. For example, a long-short strategy may short as many growth stocks and go long as many value stocks to obtain a target level of volatility."
My memory is hazy. When I looked at AQR market neutral while ago, they did exactly what is in quotes. On top of that long-short factor, they over laid equity beta of 0.5 and targeted vol of 10%. But value factor has under-performed for a quite while, which is reflected in their results. Another hurdle is the cost of funds. Any alpha in these factor is mostly for the fund operator rather than the investors. IF you are doing it personally, then that is alpha for you.
You can check academic research and dig out equity long short papers and estimate average performance of equity long-short strategies. Check for example:
https://quantpedia.com/Chart/Performance (look for keyword equity long short)
However, I would take that average number with a little cautiousness, as those returns are reported by academics and probably do not include trading costs+spread+management fee normal fund will have... If you take 16% as average and deduct all costs and fees, you will have maybe 8-10% p.a. at maximum ...
Thank you for the link.