How this fund beat (and shorted) the S&P 500
Finding US companies to short can be hard when it feels like the stock market can only go up, but some stock pickers make a living off of it.
“It’s a year where the markets have been on the tear,” Scott Utzinger, partner at Crawford Fund Management and manager of its US long/short fund, told Morning Wire.
The fund run by Utzinger has seen its long positions rise 18 per cent since the start of the year, compared to the S&P 500’s 21 per cent gain and the smaller-company focused Russell 2000’s nine per cent.
However, the fund has been dragged down slightly by its short positions, taking off 1.8 per cent of performance.
Over the last 15 years, the fund’s average annualised returns for its long positions have been 12 per cent, with a one per cent drag from the short book on the 13 per cent gain in the long book.
The fund, which launched two years ago, was the first for the company in the UK, and it has since launched a long-only version of the fund, stripping out the short selling.
When this is stripped out, the fund “handily beats” the Russell 2000 and even outperforms the S&P 500 during the 15 year period, which Utzinger said had been “a bit of a surprise” even for the managers.
“To have a small and mid cap orientated product beat the S&P, where much of the last 15 years has been all about size, scale, and the Magnificent Seven, is astonishing,” he said.
The fund makes its selections in part using what Utzinger calls a ‘pre-flight checklist’, which are around 30 ‘red flags’ the fund house looks for to avoid investing in a company.
Just five of these being present increases the risk of a company failing to eight times that of it doing well, he explained.
The list includes warning signs as simple as companies making late filings or having negative cash flow, to non-consumer focused companies naming stadiums after themselves or buying Superbowl ads.
If a company ends up with 10 of these red flags, Utzinger said he then starts to consider it as a short position.
The fund’s shorting strategy relies on two categories: Companies that have floated in the last five years (20 per cent fail within five years), and older companies that have taken on too much debt, along with a company or sector headwind which the market is underestimating.
Sectors currently being shorted by Crawford include the electric vehicle space and the AI sector, as both contain lots of young companies that have set expectations too high.