Long or Short?

Director, Research

U.S. equity markets have delivered strong results this year, but those gains were quickly erased in October. With increased volatility, more investors are looking for ways to protect their portfolios.


Alternative strategies, such as long/short equity, can potentially help smooth out the returns at the extremes and limit drawdowns. Unfortunately, some of the largest traditional long/short managers have failed to deliver, even amid today’s volatile market.


But one strategy may help add value during these turbulent times.


In the figure below, we compare the WisdomTree Dynamic Long/Short U.S. Equity Fund (DYLS) against the 10 largest competing funds in the Morningstar U.S. Long/Short Equity Category.  As you can see, year-to-date, the average of the 10 largest funds by AUM has failed to add value in this period of heightened volatility.


Year-to-Date Performance

YTD DYLS Performance

For standardized performance of DYLS, please click here.


DYLS adjusts net equity market exposure monthly, using hedging instruments; adjustments range from being fully invested (no hedge ratio applied) to fully market neutral (fully hedged).


When underlying fundamentals are strong, there is no hedge ratio applied. When fundamentals become mixed, a partial hedge is applied, and when fundamentals are weak, a full market hedge seeks to protect investors from downdrafts in the equity market while still delivering excess returns through security selection. Our research leads us to anticipate the fund’s net beta over time will likely average somewhere between 0.6 and 0.7.


With continued positive trends in corporate profits, DYLS has been mostly fully invested year-to-date. Although markets have been volatile, maintaining market risk so far has proven correct and as of the end of November has generated a positive return, even though the strategy has underperformed the S&P 500 Index.


When comparing available category performance through the latest quarter-end, the Morningstar Category found it difficult to keep up with the S&P 500 Index and DYLS, underperforming by 11.9% and 10.1%, respectively. And some of the largest funds by assets in the category have not done as well as the Median Morningstar Category Performance.


Managing risk during a wild market is never easy. But we are encouraged that over the almost three-year period DYLS has been live, the Fund  was able to beat 100%, as of September 30th, of the long/short funds in its peer group based on total return.



DYLS peer performance

DYLS Avg Total Return_93018 


Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. The Fund invests in derivatives, including as a substitute to gain short exposure to equity securities. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Derivatives used by the Fund to offset its exposure to market volatility may not perform as intended. The Fund may engage in “short sale” transactions and will lose value if the security or instrument that is the subject of a short sale increases in value. A Fund that has exposure to one or more sectors may increase the Fund’s vulnerability to any single economic or regulatory development. This may result in greater share price volatility. The composition of the Index is heavily dependent on quantitative models and data from one or more third parties, and the Index may not perform as intended. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
For more investing insights, check out our Economic & Market Outlook


About the Contributor
Director, Research
Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. Now, as Director, Research he leads the Firm’s data analytics group, responsible for index creation, maintenance and reconstitution. Tripp travels domestically and internationally to speak about WisdomTree index capabilities and meets with clients across various sales channels. He is also involved in creating and communicating WisdomTree’s thoughts on the markets. Prior to joining WisdomTree, Tripp worked in various investment-related roles for TD Ameritrade, Wells Fargo Advisors, TIAA-CREF and Evergreen Investments. Tripp graduated from The University of North Carolina at Chapel Hill with dual degrees in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation.