By Philip van Doorn
Hedge funds have been portrayed as helping the rich take outsized bets for profits — and occasionally suffering catastrophic losses.
But New York-based investment-management company Alger follows what the firm’s CEO, Dan Chung, describes as a “traditional conservative hedged-equity strategy” through a mutual fund. And it has achieved significant gains while reducing volatility, geared toward 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 the fund’s investments.
With the U.S. economy in a recovery phase, stock valuations to earnings estimates are at historically high levels. So a hedged strategy may still be appropriate for investors who have difficulty being patient during big swings for the stock market.
“For any investor, the volatility of the markets can be really rattling. It often causes investors to make the worst investing decisions,” Chung said.
It is easy to point out that the stock market has always recovered after a crash. But some investors who try to time the market by moving to the sidelines during times of turmoil might sell for losses. They can also make the mistake of buying back in too late, after a significant portion of a recovery has taken place.
The Alger Dynamic Opportunities Fund’s Class A /zigman2/quotes/205721280/realtime SPEDX +0.24% and Class Z /zigman2/quotes/200460663/realtime ADOZX +0.23% shares are rated five stars (the highest) by research firm Morningstar.
Here’s a chart showing the performance of both share classes and the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +0.63% from the end of 2019 through the close on April 2:
The point of the chart isn’t only to show that the fund has outperformed the benchmark S&P 500 during the pandemic, but to show how its strategy led to a much smaller decline during the early days of the COVID-19 outbreak in the U.S.
From the close on Feb. 19, 2020 (the day the S&P 500 Index hit its pre-pandemic high) through the S&P 500’s bottom on March 23, 2020, SPY dropped 33.7%, while the Alger Dynamic Opportunities Fund (both Class A and Class Z) fell 13.2%.
Here’s a comparison of average annual returns for longer periods through April 2, for the fund, the Morningstar Long-Short Equity category and SPY:
Those returns are after expenses and exclude sales charges (if any) for the Class A shares. For the fund’s Class A shares, the investment minimum is $1,000, the maximum sales charge is 5.25% 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. The Class Z shares have a $500,000 investment minimum and a 1.75% expense ratio. Sales charges and account minimums can vary depending on investment advisers’ relationships with Alger.
You can see that the outperformance during 2020 led to the fund beating its category and SPY for three years. It also trounced the category for five and 10 years. While it trailed SPY for those longer periods, this is in keeping with the lower-volatility strategy.
Navigating the pandemic
The Alger Dynamic Opportunities Fund doesn’t take concentrated positions in individual companies. It held 135 stocks (“long positions”) as of Dec. 31, with 74 short positions. Shorting a stock means borrowing shares and immediately selling them, hoping to repurchase them later at a lower price, returning them to the lender and pocketing the difference.
Chung said the fund’s strategy is to “invest in dynamic growth companies” rather than focus on riding the wave of price momentum. At the same time, the fund will short “companies with deteriorating fundamentals,” he said. But the short strategy also incorporates qualitative factors, including the threat from competition and a company’s strategy for retaining its market share.