Investors looking to park their capital may do so in certain ‘pockets of cheapness.’
The sell-off of momentum stocks in the first quarter as well as rising tensions in Ukraine were recipes for a volatile start to 2014 that caught retail investors and the smart-money crowd, including hedge funds, off guard. However, one hedge-fund-of-funds manager, who also manages a mutual fund using ETFs, emerged out of the first-quarter turmoil on the right side of the S&P 500 Index.
In fact, Mark Yusko, chief investment officer of Chapel Hill, N.C.-based Morgan Creek Capital Management, said his Global Equity Long/Short fund of funds topped 3 percent in the first quarter, and his topped 5 percent. In all, Yusko’s Morgan Creek manages about $4.1 billion in assets.
Yusko recently spoke to ETF.com staff writer Hung Tran about how he’s positioning his hedge fund and mutual fund portfolios to dampen further potential volatility in the technology and biotech sectors. He also discussed Russian stocks as conflict with Ukraine rises, arguing that Russia is “too cheap.”
ETF.com: There was a lot of bad press in the beginning of this year about hedge funds underperforming the broader market in 2013. How did your firm do overall in a year when the S&P rose 32 percent?
Mark Yusko: A lot of naysayers out there said hedge funds had a bad year in 2013. The average fund of funds had a tough year—up only 9 percent; and the average long/short equity hedge fund also had a tough year—up only 12-13 percent.
But there were a handful of long/short styles that were up nicely in our portfolio, driving our fund up over 25 percent.
ETF.com: Would you give us an update on your first-quarter performance?
Yusko: There was certainly some impact of the sell-off in March and April in our portfolio, and the guys who were most impacted by that were the generalists who were overweight in technology. Interestingly, our dedicated biotech manager was actually up 3 percent in March despite the big sell-off in biotech. They tend to pay not just in biotech but in some of the midcap and small-cap bio-pharma companies.
One of the benefits of long/short is you can make money on both sides, so in our tactical mutual fund, we were able to use the iShares Nasdaq Biotechnology ETF (IBB | A-45) as a hedge against our other health care exposures. So we got nervous about valuations and were able to put on some hedging to take out some of the longs in the portfolio.
We have a concern about small-caps from a valuation perspective, so we started to lean more on shorting small-caps in our portfolio as opposed to shorting the large-cap stuff. We used the iShares Russell 2000 ETF (IWM | A-84) to short small-caps, and we would have loved to use the ProShares Ultra Russell 2000 ETF (UWM) as well, but it is less liquid.
