JPMorgan, ING Funds Backfire With Long-Short Strategy (Update1)
By Sree Vidya Bhaktavatsalam
Sept. 20 (Bloomberg) -- JPMorgan Chase & Co., Charles Schwab Corp. and ING Groep NV mutual funds designed to protect investors when markets fall left clients with bigger losses than the Standard & Poor's 500 Index.
JPMorgan's $1.4 billion Highbridge Statistical Market Neutral Fund dropped 4.7 percent and ING's 130/30 Fundamental Research Fund declined 2.3 percent in the past three months, a period when the S&P 500 fell 0.3 percent, data compiled by Chicago-based Morningstar Inc. show. The average so-called long- short fund lost 1.1 percent of its value.
Assets of the funds, marketed to individuals as a way to profit from the same strategies that hedge funds offer to millionaires, doubled to $21 billion in the past two years, according to Financial Research Corp. in Boston. Vanguard Group, the No. 2 U.S. mutual-fund company, and Bank of New York Mellon Corp., the country's biggest custodian of assets, have started offering long-short products.
``They're touted as being revolutionary, which has us very skeptical,'' Morningstar analyst Michael Herbst said.
The funds have risen about 4.1 percent this year. That compares with the 6.2 percent gain of the average hedge fund through August and the 9 percent increase in the S&P 500, the benchmark for American equities, according to data compiled by Chicago-based Hedge Fund Research Inc. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
Top Fund
Not all long-short funds have fared poorly. The best performer in the category is Caldwell and Orkin Market Opportunity, which surged 13 percent in the past three months to beat its closest rival by 9 percentage points. The $162 million fund is managed by Michael Orkin in Norcross, Georgia.
Like hedge funds, long-short funds engage in short selling, in which managers seek profits by selling borrowed shares and buying them later at lower prices. More than 95 percent of mutual funds are prevented from short selling, according to U.S. regulatory filings.
Long-short funds are posting the worst declines since Morningstar started tracking them almost two years ago. San Francisco-based Charles Schwab and Geronimo Financial LLC of Denver are shutting offerings. The Geronimo Multi-Strategy Fund fell 10 percent since June 18.
Models Break Down
The $15 million DWS Disciplined Long/Short Value Fund, managed by Deutsche Bank AG's DWS Scudder unit in New York, dropped 2.2 percent during the past three months, bringing the year-to-date return to 5 percent.
``We were in the middle of the perfect storm in mid-August, and everyone experienced the same effect as the correlations broke down,'' said Doug Beck, a managing director and head of products at DWS Scudder.
ING says on its Web site that 130/30 Fundamental Research gives individual clients access to a market typically reserved for institutional investors. The fund embraces ``short selling as a way to enhance portfolio returns,'' according to the Amsterdam-based company. The fund has gained 5.3 percent this year.
New York-based JPMorgan's Highbridge Market Neutral Fund, with a $10,000 minimum investment, ``seeks to provide long-term absolute (positive) returns in all market environments,'' according to its prospectus. It has declined 1.7 percent this year, trailing the 2.9 percent return of competing funds, data compiled by Bloomberg show.
JPMorgan said the fund uses strategies designed to beat benchmarks linked to U.S. Treasuries in rising and falling markets by owning both long and short positions.
High Fees
Long-short funds charge fees of $22, or 2.2 percent, for every $1,000 invested, compared with 1.5 percent for actively managed long-only mutual funds. Managers say the higher fees are needed because shorting strategies carry higher trading costs and require more research.
Vanguard, the Valley Forge, Pennsylvania-based company known for its low-cost index funds, will take over Schwab's Laudus Rosenberg U.S. Large/Mid Cap Long/Short fund and turn it into the Vanguard Market Neutral Fund.
Schwab will also close another fund, the Laudus Rosenberg Global Long/Short Equity Fund, on Sept. 24.
Schwab decided to shut the fund, which had about $1.5 million in assets as of Aug. 31, because it has two other funds with similar strategies, Sondra Harris, a spokeswoman for the company, said in an interview.
Geronimo Financial plans to close the Sector Opportunity and Option & Income funds, in addition to the Multi-Strategy fund, the company said in regulatory filings. David Prokupek, chief executive officer of Geronimo, didn't return calls seeking comment.
To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net ;
Last Updated: September 20, 2007 09:51 EDT |
