Hedge funds have been described as helping the rich take outsized bets for profits and sometimes suffering catastrophic losses.
But New York-based investment management firm Algiers is following what company CEO Dan Chung describes as a traditional conservative strategy of hedging stocks through a mutual fund. And he made significant gains while reducing volatility, geared towards the average investor.
During an interview, Chung described the fund’s long-short strategy and how it has outperformed during the pandemic. He also gave examples of fund investments.
With the US economy recovering, stock valuations relative to earnings estimates are at historically high levels. Thus, a hedged strategy may still be suitable for investors who find it difficult to be patient during large fluctuations in the stock market.
For any investor, market volatility can be really clicky. This often causes investors to make the worst investment decisions, Chung said.
It’s easy to point out that the stock market has always recovered after a crash. But some investors who try to time the market by sidelining during times of turmoil could sell for losses. They can also make the mistake of buying back too late, after a significant portion of the recovery has taken place.
Algiers Dynamic Opportunities Funds Class A SPEDX,
and Class Z ADOZX,
stocks are rated five stars (highest) by research firm Morningstar.
Here is a chart showing the performance of the two share classes and the SPDR S&P 500 ETF Trust SPY,
from the end of 2019 to the closing on April 2:
The purpose of the chart is not only to show that the fund outperformed the S&P 500 benchmark during the pandemic, but also to show how its strategy led to a much smaller drop in the early days of the COVID-19 outbreak in the United States.
From the close of February 19, 2020 (the day the S&P 500 index peaked before the pandemic) to the S&P 500 low on March 23, 2020, SPY fell 33.7%, while Algiers Dynamic Opportunities Fund (Class A and Class Z) fell 13.2%.
Here is a comparison of the average annual returns over longer periods up to April 2, for the fund, the Morningstar Long-Short Equity category and SPY:
These returns are after-load and exclude the sales charge (if any) for the Class A shares. For the Class A share funds, the minimum investment is $ 1,000, the maximum sales charge is 4 , 5% and annual expenses are 2% of assets under management. That’s a high management fee compared to most mutual funds. However, Morningstar considers it below average for its Long-Short Equity category. Class Z shares have a minimum investment of $ 500,000 and an expense ratio of 1.75%. Subscription fees and account minimums may vary depending on the relationship of the investment advisers with Algiers.
You can see that the outperformance in 2020 led the fund to beat its class and SPY for three years. He also beat the category for five and 10 years. Although he has been tracking SPY for these longer periods, this is in line with the low volatility strategy.
Navigate the pandemic
The Alger Dynamic Opportunities Fund does not take concentrated positions in individual companies. He held 135 shares (long positions) as of December 31, with 74 short positions. Bypassing a stock means borrowing stocks and selling them immediately, hoping to buy them back later at a lower price, return them to the lender, and pocket the difference.
Chung said the funds’ strategy is to invest in dynamic growth companies rather than focusing on the wave of price momentum. At the same time, the fund will sell companies with deteriorating fundamentals, he said. But the short strategy also incorporates qualitative factors, including the threat of competition and a business strategy to retain market share.
Although Chung was unable to discuss short positions, he gave an example from years ago of a company that he and his team decided to avoid. The fund held a significant position in Research In Motion, the maker of BlackBerry phones, which were popular in the pre-iPhone / Android era due to their messaging capabilities. (RIM has been renamed BlackBerry BB,
We loved RIM / Blackberry as a growth stock, Chung said. But in this case, we saw the competition coming. [For] the first smartphones, the main thing they would do, which was new, was to be able to browse the web. So Algiers ended up selling the shares.
Discussing the fund’s outperformance in 2020, Chung said: We didn’t predict COVID-19, but we were concerned about the levels the market had reached at the end of 2019.
In 2019, the S&P 500 Index returned 31.5%. One of the ways the fund has hedged itself has been to short sell exchange traded funds. Chung did not specifically say which fund shorted in early 2020, but did say that at times it shorted SPY and ETFs which track the Russell 1000 RUI index,
Russell 2000 RUT Index,
or subsets of these indexes.
As of December 31, 2020, the fund’s largest short position was the iShares Russell 2000 Growth ETF IWO,
He also bypassed the iShares Russell Mid-Cap Growth ETF IWP,
and the iShares Russell 1000 Growth ETF IWF,
It’s not that we’re particularly negative on the Russell 2000 or the smaller growth stocks, Chung said. One of the things we have to do is that because we buy a lot of small cap growth stocks, we also have a short position in an ETF that holds small growth stocks. We will often use ETFs to do this because they are efficient and cheap.
Long positions taking advantage of trends
When asked how the fund continues to outperform as the market as a whole recovers from its March 2020 low and then soars, Mr Chung said the Algiers team has taken advantage of accelerating trends. by the pandemic. This meant increasing the size of its investments in e-commerce companies, including Amazon.com Inc. AMZN,
and Chegg Inc. CHGG,
which provides online training services. Chung also pointed out CrowdStrike Holdings Inc. CRWD,
which develops security software in the cloud.
The Alger Dynamic Opportunities Fund also has long positions in Shopify Inc. SHOP,
which provides an e-commerce platform for merchants, and Wayfair Inc. W,
an e-commerce site that focuses on furniture and housewares.
A negative trend exacerbated by COVID-19 has been the difficulty for homeowners with physical retail properties.
In this crisis, a lot of real estate in the shopping area will fail and change hands, Chung said. This expectation led Algiers to take a long position in Simon Property Group Inc. SPG,
that Chung described as the best capitalized and the best positioned [of shopping-mall owners] to buy things at low prices.
Two companies with high moats
Chung named two other long positions companies that suffered last year but which he believes are most likely to benefit from the recovery, in part because of the high moats competitors have to cross:
Heico Corp. HEI,
manufactures spare parts for airplanes.
They are the primary supplier of FAA approved parts for aerospace engines and aircraft, Chung said.
Going back to that peak-to-trough period of February 19 to March 23 of last year, the stock fell 49%. But it ended up gaining 16% for 2020 before declining 3% so far in 2021.
Chung said that during normal times in the airline industry, Heico is increasing sales at an annual rate of 7%.
We can all see that one of the main things that consumers want to come back to is travel. Airlines will have to speed up their flights and maintain the planes, he said. He called Heico a high-margin company, with operating margins of around 22% in normal times, with profit growth and free cash flow in the low-teens, long-term.
The second company, CoStar Group Inc. CSGP,
provides detailed information on commercial properties to real estate brokers. Chung said the company is like Bloomberg, in its niche because its proprietary data is essential for brokers. He said that over the long term, CoStar tends to increase sales in their mid-teens, as well as profits and free cash flow at annual rates of over 20%.
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