Hedge funds have been described as helping the wealthy to make big bets for profit and sometimes suffer catastrophic losses. But New York-based investment management company Alger follows what company CEO Dan Chung describes as a “traditional conservative stock hedge strategy” through a mutual fund. And it has made significant gains while reducing volatility, geared toward the average investor.
(Set of facts)
The purpose of the chart is not just 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 US. At the close of February 19, 2020 (the day the S&P 500 index peaked before the pandemic) through the S&P 500 fund on March 23, 2020, SPY fell 33.7%, while the Alger Dynamic Opportunities Fund (both Class A and Class Z) fell 13.2%. Below is a comparison of average annual returns for longer periods through April 2, for the fund, the Morningstar Long-Short Equity category, and SPY:
(Morningstar, Fact Set)
Those returns are after expenses and exclude sales charges (if any) of Class A shares. For Class A shares of the fund, 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 administration 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%. Sales charges and account minimums may vary depending on the investment advisers’ relationships with Alger. You can see that the superior performance during 2020 led the fund to outperform its category and SPY for three years. He also defeated the category for five and 10 years. While it lagged behind SPY during those longer periods, this is in line with the lower volatility strategy. Navigating the pandemic The Alger Dynamic Opportunities Fund does not take positions concentrated in individual companies. It had 135 stocks (“long positions”) as of December 31, with 74 short positions. Shorting a stock means borrowing shares 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 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 shorten “companies with deteriorating fundamentals,” he said. But the short strategy also incorporates qualitative factors, including the threat of competition and a company’s strategy to retain its market share. While Chung was unable to discuss short positions, he provided an example from many years ago of a company that he and his team chose to avoid. The fund had a significant position in Research In Motion, the maker of BlackBerry phones, which were popular in the pre-iPhone / Android era due to their email capabilities. (RIM was renamed BlackBerry BB, + 2.09% in 2013). “We loved RIM / Blackberry as a growing stock,” Chung said. “But in this case we saw the competition coming. [For] the first smartphones, the main thing they did, which was new, was to be able to surf the web. “Then Alger ended up selling the shares. Discussing the fund’s outperformance during 2020, Chung said:” We did not predict COVID-19, but we were concerned about the levels the market had reached at the end of 2019. “During 2019, the S&P 500 Index returned 31.5%. One of the ways the fund hedged was by shorting exchange-traded funds. Chung did not specifically say which ones the fund had shortened in early 2020, but did say that it has on occasion shortened SPYs and ETFs that track the Russell 1000 Index RUI, + 0.91%, Russell 2000 Index RUT, +0.03% or subsets of those indices. As of December 31, 2020, the fund’s largest short position was the IWO iShares Russell 2000 Growth ETF, + 0.73%. It had also shorted the iShares Russell Mid-Cap Growth ETF IWP, + 0.29% and iShares Russe IWF ETF ll 1000 Growth, + 1.26%. “It’s not that we’re particularly negative on Russell 2000 or small-growth stocks,” Chung said. “One of the things we need to do to be conservative is that because we are long in a lot of small-cap growth stocks, we are also short in an ETF that has small-growth stocks. We will often use ETFs to do that because they are efficient and cheap. ” Long Positions: Taking Advantage of Trends When asked how the fund continued to perform better as the overall market rebounded from its March 2020 low and then spiked, Chung said the Alger team took advantage of trends accelerated by the pandemic. . This meant increasing the size of its investments in e-commerce companies, including Amazon.com Inc. AMZN, + 1.07% and Chegg Inc. CHGG, + 0.21%, which provides online education services. Chung also pointed to CrowdStrike Holdings Inc. CRWD, -0.31%, which develops cloud security software. The Alger Dynamic Opportunities Fund is also long in Shopify Inc. SHOP, + 0.19%, which provides an e-commerce platform to merchants, and Wayfair Inc. W, -3.90%, an e-commerce site that focuses on furniture. and household items. A negative trend exacerbated by COVID-19 has been the hardship for homeowners who own physical retail properties. “In this crisis, a lot of real estate in the commercial area will default and change hands,” Chung said. This expectation has led Alger to take a long position in Simon Property Group Inc. SPG, -0.30%, which Chung described as “the best capitalized and best positioned [of shopping-mall owners] to buy cheap things. “Two companies with” high pits “Chung named two more long positions, companies that suffered last year but which he believes are” very likely to benefit from the recovery “, in part due to the” pits high “that competitors must cross: Heico Corp. HEI, + 1.25% manufactures aircraft parts.” They are the leading supplier of FAA approved parts for aerospace engines and aircraft, “Chung said. Going back to that high-to-low period. From February 19 to March 23 last year, the stock fell 49%, but ended up gaining 16% for 2020 before falling 3% so far in 2021. Chung said that during normal times for the industry of airlines, Heico increases its sales at an annual rate of 7%. “We can all see that one of the most important things that consumers want to return to is travel. Airlines will need to increase their flights and they have to maintain planes.” he said. I am a “high-margin business,” with operating margins around 22% during normal times, with profit and free cash flow growth “in the low teens, long-term.” The second company, CoStar Group Inc. CSGP, -1.96%, provides detailed information on commercial properties to real estate brokers. Chung said the company was “like Bloomberg” in its niche because its proprietary data is indispensable for brokers. He said that in the long run, CoStar tends to increase sales in the “mid-teens” and profits and free cash flow at annual rates of more than 20%. Don’t miss out: These infrastructure stocks could rise as much as 41% in one year under Biden‘s massive spending plan, analysts say.