Long-Short
The hottest hedge fund strategy in the world right now is a Long-Short equity approach popularized by AQR Capital Management (AQR) which has managed to vacuum in some $100B+ in assets under management.
The Long-Short strategy is seductively simple, and when executed correctly can validate the fees being charged. Simply put, a Long-Short strategy seeks overall total portfolio growth, but how it accomplishes this is interesting.
Investors, predominantly higher-net-worth and/or those with concentrated stock positions, either deploy capital in the form of new cash or inject existing equity positions into the strategy. To fully benefit from the strategy assets are typically non-qualified (read as non-IRA, 401k, Roth, etc.) Typically these are assets which normally would be subject to the standard tax code.
Using a Long-Short strategy a Portfolio Manager is simultaneously LONG (ie owning the position outright) and SHORT (selling a position he does NOT own.) This can be confusing, most people understand the LONG leg of the strategy. It means you are betting on the future appreciation of a stock for example. A SHORT position is just the opposite; you are betting on the future DEPRECIATION of a stock.
For better or worse, modern finance has "evolved" via the use of derivatives to allow for short selling and also purchasing of options contracts like CALLS and PUTS which give the buyer the OPTION (but not the requirement) to either BUY or SELL a stock.
Jones published a finding of his research in the March 1949 issue of Fortune magazine titled "Fashions in Forecasting."
Warren Buffett took notice. In 1956 Buffett started Buffett Associates with $105,000 and a 50% (you read that correctly) management fee on any return GREATER than 4%. A classic Balzacian outcome ensued, ie: "The secret of a great fortune for which you can find no cause is a clean crime, because it was cleanly done."
Carol Loomis reported on Jones's results in 1966, some 17 years after Jones had launched A. W. Jones & Company. This sparked further imitation including by George Soros and his Quantum Fund as well as Michael Steinhardt's Steinhardt Partners.
This strategy got so hot in fact, oddly Buffett closed down Buffett Partnership at the end of 1969. He told his partners something to the effect that there was little future opportunity in a company he had just purchased called Berkshire Hathaway.
Fast forward some 50 years AQR founder Cliff Asness, along with a host of firms, are raking in the assets by offering a classic Long-Short hedge fund strategy...with a twist: A big selling point is that the 2.0 version THROWS OFF LOSSES.
Why in the world would savvy investors want LOSSES? ILAF readers know we are all about growth. Why would sophisticated, wealthy, and smart investor want to LOSE money? Ahhh...read on dear farmers...as they say "timing is everything."
To a rich man losses are as valuable, if not more, than taxable gains. The reason for this is the way the tax code is structured. Although a Long-Short strategy's OVERALL goal may be to pursue growth, it has a very, very interesting feature of throwing off significant losses.
These losses can be harvested just like ripe fruit my dear fellow farmers. Succulent, aromatic, peach juice dripping down your elbow delicious losses. And like any good harvest, you can can those peaches baby! So losses can be carried over from year-to-year-to-year.
Think of it like this: You have a farm with dozens of crops. Every year many of those crops grow and do extremely well. Some, however, fail. The current tax code allows you to harvest that loss, and keep it on your books INDEFINITELY.
Sooner or later you *might* need to take a gain, for whatever reason; ie you are in need of a 2nd, 3rd, 4th home or your G550 needs engine work. Fear not. That carried loss can now be applied to your large gain.
As Apple, Facebook, Google, OpenAI, Anthropic, Microsoft, Amazon, SpaceX, etc. engineers occasionally leave their offices Wealth Managers are waiting for them in the parking lots ready to offer them this fantastic opportunity.
This Long-Short 2.0 strategy has been increasingly proactive in the crystallization of the "K-shaped" economy where the (financial) winners are predominantly young(er) engineers or employees with significant equity stakes AND Baby Boomers at the highest echelons with considerable net worth.
Consider, there are almost a MILLION Americans with OVER $10M. Over 100,000 have $50M+. And some 10,000 have over $100M. A lot, probably 80-95%, of that wealth is in UNREALIZED gains that will not be taxed until it is realized. Even in death there is a significant tax break in terms of the cost basis being RESET to fair market value.
So if you're a financial farmer plowing the fields, earning a good living, and saving for the future it probably makes sense for you to consider allocating a good portion of your liquid net worth to a Long-Short approach tailored to your specific needs, risk tolerance, and time horizon. Call Us, We Can Help!
PS--What in the world are those gold bars at the top of this blog? The Pyrgi Tablets are three ~2500 year-old solid gold plates discovered in Italy in 1964. Inscribed in both Etruscan and Phoenician, these 7.5 inch by 3.5 inch plates are considered the oldest major historical source documents from pre-Roman Italy.
Why is this important? This is an investment blog! Steady dear reader steady! The Pyrgi Tablets also are the precursors to modern the phonetic alphabet (minus 4 letters) and oddly a curious tie-in to modern portfolio management. Our old friend Alfred Winslow Jones set his performance fee to the Phoenician Captain's take, 20% of the boat's profits.
The enduring remnants of Phoenician civilization is the alphabet, which was arguably the first recorded phonetic alphabet which was then adopted by the Greeks and Romans, Modified. Improved with vowels. And ultimately became one of the first PROGRAMMING codes with allowed for repetitive duplication with clarity across vast distances ensuring precision and understanding.
It may be a reach to consider the Phoenicians the founders of the first hedge funds, but given the alphabetic contribution they laid the groundwork for the adoption of a unified language which led to the codification of rule sets; namely the tax code and the development of the Long-Short strategy to harness derivative products and leverage with the goal of magnifying growth and productivity for humanity.
And that is the Long-Short of it!
