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4 Long/Short Mutual Funds to Buy as Volatility Rises

After witnessing a surge in the volatility level earlier this year, markets registered a significant rebound. However, the recent slide in the major benchmarks following concerns including dismal first-quarter earnings pushed up volatility again. When markets experience a high level of volatility, investors always look for a strategy to protect their portfolio from it.

Investing in mutual funds that use the long and short investment strategies may shield a portfolio in a volatile environment. Against this backdrop, we have identified some long/short mutual funds that can be ideal investment options. But before going into that discussion, let’s have a look at the key reasons that were responsible for the rise in volatility in recent times.

Rising Volatility

While the Dow and the S&P 500 registered their third straight weekly declines for the first time last week since the week ended Jan 15, the Nasdaq posted its fourth consecutive weekly loss for the first time since Oct 2014. Meanwhile, the CBOE Volatility Index (VIX) – “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices” – surged 10% over the past one-month period. Though the Dow notched its first three-month winning stretch since Jan 2014 and the S&P 500 gained for the second straight month for the first time this year in April, the volatility index saw an increase of 12.5% last month.

Concerns stemming from weak first-quarter earnings results emerged as one of the main culprits. Total first-quarter earnings for the 459 S&P 500 members that reported as of May 13 were down 7.3% from the year-ago quarter on 1.4% lower revenues. Also, total Q1 earnings are currently expected to be down 6.9% from the same period last year on 1.1% lower revenues. This will be the fourth quarter in a row of earnings decline for the index. (Read: Retail's Amazon Problem)

Separately, oil prices movement also had a significant impact on the major benchmarks. While encouraging data including the decline in crude inventories and U.S. rig count, and a fall in crude production in Nigeria had a positive impact on oil prices, oversupply concerns continue to dampen investor sentiment.

Meanwhile, a mixed bag of domestic data also affected the performance of the benchmarks. Dismal economic data including a mixed non-farm payroll report, the rise in initial claims to a record level and a decline in the ISM Manufacturing index lowered investor confidence. However, data including a record increase in retail sales along with rise in the ISM Services index and Producers Price Index (PPI) had a positive impact on the benchmarks. Meanwhile, mixed economic data also raised uncertainty over rate hike.

Why Long/Short Funds?

The long/short fund will go long, or buy securities of companies that are poised to increase in value while shorting securities that the manager expects will see a decline in price. Thus, equity long/short funds seek to gain from both winning and losing stocks, irrespective of the current market condition. This strategy uses leverage, derivatives, and short positions to derive maximum total return.

Moreover, these funds hold more short positions in a rising market and long positions in a falling market. At the same time, this strategy ensures lower downside risk. These funds are therefore an ideal choice during periods of high volatility.

4 Long/Short Funds to Buy

We have highlighted four Long/Short Mutual Funds that either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or a Zacks Mutual Fund Rank #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Moreover, these funds have encouraging three-year and five-year annualized returns. The three-month return is also impressive. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and carry no sales load.

Glenmede Long/Short (GTAPX) seeks absolute return. GTAPX invests a large portion of its assets in equity securities using the long/short strategy. The fund invests in equity securities of companies having market capitalization identical to those listed in the Russell 3000 Index.

GTAPX currently has a Zacks Mutual Fund Rank #1. The fund has three-month, three-year and five-year annualized returns of 1.5%, 4.3% and 4.8%, respectively. Annual expense ratio of 1.16% is significantly lower than the category average of 1.94%.

Astor Long/Short I (ASTIX) seeks total return through a combination of capital appreciation and income. ASTIX invests the lion’s share of its assets in exchange traded funds (ETFs). These ETFs primarily invest in equity securities, fixed-income securities, alternative/specialty securities, or cash equivalents.

ASTIX currently has a Zacks Mutual Fund Rank #1. The fund has three-month, three-year and five-year annualized returns of 8.7%, 3.7% and 2.2%, respectively. The product has an annual expense ratio of 1.25%.

Schwab Hedged Equity (SWHEX) seeks long-term capital appreciation with lower volatility than the overall market. SWHEX invests the majority of its assets in long and short positions with respect to equity securities. The fund primarily focuses on acquiring securities of domestic companies with market capitalization of more than $1 billion.

SWHEX currently has a Zacks Mutual Fund Rank #1. The fund has three-month, three-year and five-year annualized returns of 5.6%, 5.7% and 5.6%, respectively. Annual expense ratio of 1.33% is lower than the category average of 1.94%.

Aberdeen Equity Long-Short A (MLSAX) seeks growth of capital over the long run. MLSAX invests a large portion of its assets in long and short positions in equity securities of companies that are primarily located in the U.S.

SWHEX currently has a Zacks Mutual Fund Rank #2. The fund has three-month, three-year and five-year annualized returns of 5%, 1.2% and 1.9%, respectively. Annual expense ratio of 1.56% is lower than the category average of 1.94%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.


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