Zenith Review: Global Long/Short funds pay their way despite higher fees

Jacob Smart

Global long/short funds have passed a litmus test on whether higher fee investments can be compensated with higher investors returns, according to Zenith’s most recent Sector Review.

Zenith’s 2017 Global Shares – Long/Short Sector Review compared the fees, performance and volatility of both long-only and long/short funds in the global equity asset class. While both groups invest in the same universe of stocks, only long/short funds can short-sell as a way to potentially deliver positive returns even if stock prices fall (albeit short selling comes with additional risks).

The Review found that the average global long/short fund charges a significant fee premium relative to long-only peers (with Indirect Cost Ratios of 2.17% and 1.02% respectively).

Zenith found that although investors can pay significantly more to invest in global long/short funds, the associated absolute and risk-adjusted returns are typically superior to their global long-only counterparts. On average for the three years to 30 June 2017, global long/short funds achieved higher returns than their global long-only counterparts (14.1% p.a. versus 12.9% p.a.), even after fees are taken into account.

The Review also considered whether investors were compensated for the higher return in terms of risk, as measured by standard deviation. Both groups recorded similar levels of risk (10.9% p.a. versus 10.6% p.a.), suggesting that investors have typically been sufficiently rewarded for both the higher return and the premium fees paid for global long/short funds.

Jacob Smart, Zenith Investment Analyst said “investors need to consider the higher fees of global long/short funds in the context of the specialised skill sets required, additional liquidity constraints on short selling and the leverage employed by these strategies requires them to manage a higher level of market exposure.  Overall, we believe this premium is justified and the performance differential in this review period validates that proposition.”

The Sector Review also revealed that the changes in fee disclosure under RG97 is likely to have no impact on the net returns of existing investments. Zenith notes that investors have always been paying these newly disclosed fees, however previously they were not required to be disclosed in a formal manner. Smart said “we believe the increased fee disclosures under RG97 are positive as investors are afforded improved transparency around the underlying costs associated with their investment.”