According to a high-conviction Australian equity manager, a 150/50 strategy may actually carry less drawdown risk than a market neutral approach.
Alleron Investment Management chief executive Barry Littler explained that a 150% geared long portfolio funded by a 50% short portfolio has the potential to deliver a better risk-adjusted return than long-only or market neutral portfolios.
To illustrate, Littler pointed to data on his firm's Australian Eagle Trust Long-Short Fund, in which shorts have negative alpha correlation to the long portfolio, shoring up the latter during market downturns.
As at July 2017, the fund returned 24.48% net of fees; as at September, it has 33 long positions and 15 short positions.
"Market neutral paradoxically can be more exposed to drawdown risk than a 150/50 structure when low quality stocks run hard," Littler said.
Alleron specialises in large cap equities across long and short portfolios. It was estalbished by Litter and Albert Hung in 2004, and became wholly-owned by its employees following a management buyout from Westpac in 2015.