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The Best And Worst Of January: Market-Neutral Funds

Market-neutral mutual funds and ETFs posted aggregated loses of 0.14% in January, bringing their one-year totals through January 31 to a near-flat +0.01%. Market-neutral funds, which seek a balance between long and short equity positions in pursuit of returns that are uncorrelated with the broad market, have had an ultra-low beta of 0.13, relative to the Barclays U.S. Aggregate Bond Index, for the year ending January 31, but have averaged just 0.04% of alpha over that time. Average volatility of the funds has been low, as the category has an aggregate one-year standard deviation of just 4.89%; but risk-adjusted returns have been unimpressive, with the average fund in the category sporting a one-year Sharpe ratio of -0.16. Top Performers in January The three best-performing market-neutral funds in January were: QuantShares U.S. Market Neutral Anti-Beta ETF (NYSEARCA: BTAL ) Hussman Strategic Growth Fund Inv (MUTF: HSGFX ) Cognios Market Neutral Large Cap Fund Inst (MUTF: COGIX ) The QuantShares U.S. Market Neutral Anti-Beta ETF ( BTAL ) was January’s top-performing market-neutral product, posting monthly gains of a whopping 9.48%! For the year ending January 31, the fund was up 6.24%, generating 9.81% of alpha with a beta of 3.96, relative to the Barclays U.S. Aggregate Bond Index. That high beta may not be attractive to market-neutral investors despite the bullish returns, and the ETF’s 13.58% one-year standard deviation falls at the top of the rankings for the category. Among the 58 funds in the category with a 1-year track record, BTAL earned a one-year Sharpe ratio – a measure of risk-adjusted performance – of 0.66, outperforming all but 13 funds. The Hussman Strategic Growth Fund Inv ( HSGFX ) was among the top-performing market-neutral mutual funds in January, ranking second only to the above ETF in the category. The fund’s January returns of +5.01% weren’t enough to push it into the black for the year, though, as it was down 6.91% for the 12 months ending January 31. HSGFX produced a -6.25% alpha over the past year, with a beta of 1.53 and volatility of 11.94%. This yielded a one-year Sharpe ratio of -0.55 – not the worst in the category, but certainly worse than the category average. The Cognios Market Neutral Large Cap Fund Inst ( COGIX ) ranked third in January, with returns of +4.29%. For the year ending January 31, the fund’s gains of 10.16% ranked in the top 2% of the Morningstar Market Neutral category. Those gains break down into a 1.66 beta and 10.27% alpha, with a very nice 1.26 Sharpe ratio and 7.88% volatility. The fund, which launched on the last day of 2012, had annualized three-year gains of 7.87%, earning it a five-star rating from Morningstar . Bottom Performers in January The three worst-performing market-neutral funds in January were: Highland HFR Event-Driven Activist ETF (NYSEARCA: DRVN ) Schooner Hedged Alternative Income Fund Inst (MUTF: SHAIX ) Turner Titan Long/Short Fund Inst (MUTF: TSPEX ) An ETF was the top-performing market-neutral fund in January, and an ETF was the worst performer: The Highland HFR Event-Driven Activist ETF ( DRVN ) fell 8.50% for the month, making it the category’s worst by a wide margin. The fund only launched on May 29, 2015, and thus, doesn’t have longer-term performance numbers to analyze. The Schooner Hedged Alternative Income Fund Inst ( SHAIX ) lost 3.91% in January, but still held on to a +1.88% one-year return through January 31. The fund had a beta of -1.58 over the past year and generated an alpha of 1.67%. Its annualized volatility of 6.62% was the lowest of any fund reviewed this month. All of this adds up to a decent Sharpe ratio of 0.30. Finally, the Turner Titan Long/Short Fund Inst (TPSEX) had the third-worst performance of all market-neutral funds in January, with its shares falling 3.24% for the month. Nevertheless, the fund maintained one-year returns of +3.50% (an alpha of 3.36%) through January 31, with a beta of -1.22. TPSEX had annualized volatility of 7.27% through January 31, and a Sharpe ratio of 0.50. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

The Best And Worst Of January: Multialternative Funds

Multialternative mutual funds and ETFs averaged losses of 1.60% in January, bringing their average one-year returns through the end of the month to -4.23%. Over the longer three- and five-year periods, multialternative funds have generated positive annualized returns, but at just +0.87% (three-year) and +1.66% (five-year), those returns have delivered negative alpha of 0.81 and 0.99, respectively, relative to Morningstar’s long-only Moderate Target Risk Index. As a whole, the category is host to 163 funds with combined assets of $62.5 billion. At $8.9 billion, the John Hancock Global Absolute Return Strategies Fund (MUTF: JHAIX ) is the largest fund in the category with a 14.2% market share, while the top 10 funds hold a total of $31.7 billion in assets – just over 50% of the category’s total assets. Top Performers in January January’s top-performing multialternative fund was able to generate big gains of 7%, while the second- and third best funds added between 2-3%. The three best-performing multialternative funds in January were: CMG Global Macro Strategy Fund (MUTF: PEGAX ) Absolute Strategies Fund (MUTF: ASFIX ) Vanguard Alternative Strategies Fund (MUTF: VASFX ) PEGAX, the top-performing fund of January, only launched in December 2015. In its first full calendar month, PEGAX returned an impressive +7.00%. According to Morningstar, $10,000 invested in the fund at its inception would have grown by $120 as of February 17 – not bad for just over two months. ASFIX (one of the oldest funds in the category) and VASFX produced gains of 2.87% and 2.83%, respectively, in what was a volatile January for the markets. Of the two funds, only ASFIX has been trading at least a year, and it returned +0.31% for the 12 months ending January 31. The fund’s one-year alpha and beta numbers were -2.25% and -0.65 (relative to the Morningstar Moderate Target Risk Index), through that date, with a Sharpe ratio of 0.07 and volatility of 5.49%. These numbers compare somewhat favorably to the category averages of -2.29%, 0.49, -0.82, and 5.76%. Worst Performers in January While the bottom three funds struggled as equity markets sold off in January, there is a silver lining – the month’s worst-performing fund was solidly in the black for the year ending January 31. The three worst-performing multialternative funds in January were: Catalyst Macro Strategy Fund (MUTF: MCXAX ) Quantified STF Fund (MUTF: QSTAX ) Tocqueville Alternative Strategies Fund (MUTF: TALSX ) Although MCXAX was January’s worst-performing fund by a long shot at -10.24%, the fund was actually the category’s top performer for the year ending January 31, with gains of 32.05%! With a beta of 2.71 to the Morningstar Moderate Target Risk Index, these one-year gains produced an alpha of 42.08% and a Sharpe ratio of 1.19. However, volatility came in at a whopping 26.03% – numbers that are somewhat reminiscent of Barry Bonds’ late-career stats. QSTAX saw its shares fall by 8.05% in January. The fund, which only launched in November 2015, doesn’t have a long enough track record for further analysis. Finally, TALSX was the third-worst performing multialternative fund in January, with one-month losses of 6.53%. For the year ending January 31, TALSX lost 9.45%, thanks to an alpha of -5.30%. Its beta over the time period was 1.05, while its one-year Sharpe ratio stood at -1.00, and its annual volatility was 9.53%. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

The Best And Worst Of January: Long/Short Equity

Long/short equity mutual funds and ETFs posted losses in January, making it the fourth time in the past five months that the category failed to log gains. After suffering losses of 1.21% in December, the average fund in the category lost another 3.30% in the first month of 2016. This dipped the category average for the year ending January 31 into the red at -3.86%, compared to the S&P 500’s return of -0.67%. For the three-year period ending January 31, long/short equity funds have averaged annualized gains of just 2.77%. The S&P 500, by contrast, has returned +11.30% over that same time. Using the S&P 500 as a benchmark, long/short equity mutual funds and ETFs have generated -3.03% annualized alpha over the past three years, with an average beta of 0.53. The category’s three-year Sharpe ratio of 0.40 compares poorly with the S&P’s 1.03, and although long/short equity funds have had less volatility (8.30% per year versus 10.94%), it would be a stretch to characterize their aggregate performance as anything other than disappointing. Nevertheless, there were some standout performers in January, with the top fund generating gains of nearly 5%. The worst performers, however, really struggled, with losses ranging from over 10% to nearly 20%. Top Performers in January The three best-performing long/short equity mutual funds in January were: CMG Long/Short Fund A (MUTF: SCOTX ) Otter Creek Long/Short Opportunity Fund Inst (MUTF: OTTRX ) Catalyst Insider Long/Short Fund A (MUTF: CIAAX ) SCOTX was the top-performing long/short equity fund in January, posting monthly gains of 4.81%, but over the longer term, the fund’s performance has been dismal. For the year ending January 31, for instance, SCOTX returned -21.79%, and for the three-year period ending on that date, its annualized returns were -8.76%. The fund’s three-year alpha stood at a woeful -10.56%, on top of a 0.19 beta and a Sharpe ratio of -0.65. Long/short equity funds are supposed to have less volatility than long-only stocks, but SCOTX’s three-year standard deviation of 12.87% was higher than the S&P 500’s 10.94%. January’s second-best long/short equity fund, by contrast, added 3.49% in monthly gains, to bring its one-year returns to an outstanding +13.82%. These gains rank the fund at the very top of its Morningstar category, but since the fund only launched in late 2013, it doesn’t have three-year data available. CIAAX posted a 2.94% gain in January, bringing its one-year total through the end of the month to +6.37%. Over the three-year period, it posted annualized gains of 3.37%, consisting of 0.99% annualized alpha and a 0.31 beta. This gave the fund a three-year Sharpe ratio of 0.28, with high annualized volatility of 15.81%. Worst Performers in January The three worst-performing long/short equity mutual funds in January were: Catalyst Hedged Insider Buying Fund A (MUTF: STVAX ) Philadelphia Investment Partners New Generation Fund (MUTF: PIPGX ) Highland Long/Short Healthcare Fund A (MUTF: HHCAX ) STVAX, PIPGX, and HHCAX all had atrocious months in January: STVAX lost a whopping 19.24%, PIPGX fell 17.54%, and HHCAX tumbled 10.29% in just 31 calendar days. This put all three funds deep into the red for the year ending January 31: -30.28%, -33.07%, and -17.23%, respectively. All three of the worst performers have been around for more than three years, with respective returns of -12.75%, -13.64%, and +8.84% – HHCAX is the one fund with longer-term gains. Its three-year alpha, beta, and Sharpe ratio of +5.92%, 0.33, and 0.61, respectively, are better or roughly as good (its 0.33 beta isn’t as attractive as CIAAX’s 0.31) as that of any fund reviewed this month, although its three-year annualized volatility of 15.78% is among the highest of all long/short equity funds with 3-year track records. STVAX and PIPGX, by contrast, fail across the board. Their respective three-year alphas of -29.18% and -25.06%, respectively, are at the bottom of the category; their betas of 1.60 and 1.02, respectively, are among the highest in the category and much higher than that of typical long/short equity funds; their Sharpe ratios of -0.51 and -0.95, respectively, show they’re a bad risk/reward proposition; and their annualized volatilities of 21.90% and 14.29%, respectively, are far higher than that of the broad market. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.