Beyond black box investing: Fund uses database four times the size of Wikipedia

BlackRock's Global Long/Short Equity Fund is a computer nerd's dream and a potentially valuable portfolio addition

Dec 26, 2013 @ 11:10 am

By Jason Kephart

blackrock, mutual fund, long/short, alternatives, derivatives, futures, options
+ Zoom

The BlackRock Global Long/Short Equity Fund is a computer nerd's dream and, with its ability to zig when the rest of the market zags, a potentially valuable addition to a portfolio.

The $370 million fund (BDMAX), which turned one-year old Dec. 20, is the second alternatives mutual fund born from BlackRock Inc.'s 90-person Scientific Active Equity team, following the October 2011 launch of the now $635 million BlackRock Emerging Markets Long/Short Fund (BLSAX).

The Scientific Active Equity team takes quantitative investing to a whole new level. In fact, the team has amassed so much data on publicly traded companies that its database is now four times the size of Wikipedia and eight times the size of the Library of Congress.

“We're leveraging everything we have to our advantage,” co-portfolio manager Paul Ebner said.

And when he says everything, he really means everything.

In addition to the usual fundamentals such as earnings, revenue and cash flow, the supercomputer at the team's disposal combs through hundreds of documents — from earnings call transcripts, to news releases, to analyst reports — looking for clues to a stock's future.

Words such as “uncertain” or “challenging” are tagged as negative signs, and words such as “new customers” or specific numbers are tagged as positive signs.

Overall, Mr. Ebner and his co-portfolio managers Raffaele Savi and Kevin Franklin are examining the data to see how companies look on valuation, quality and investor sentiment factors.

The work isn't left solely to the computer, though. The managers add a top-down macro view to uncover companies that have bigger head winds or tail winds affecting them. In general, that leads to the fund buying companies that rank well on the three quantitative metrics and have macro head winds behind them and shorting companies that are the reverse.

In the first half of the year, for example, the managers had a negative view on Chinese growth and ended up shorting poorly ranking companies that got their revenue from Chinese expansion.

This year, the fund's bets have turned out well so far. It returned 18.98% through Dec. 19, topping the average long/short equity fund's 13% return.

Lumping it in with all long/short funds might not be fair, however, because the BlackRock Global Long/Short Equity Fund is more of a long/short market-neutral hybrid. Even though the fund was net short Chinese growth companies, it maintained sizable long positions in the rest of the fund to lower the fund's overall volatility and correlation to the global equity market. The fund will also be at least 80% short and can go up to a net 40% long, for example.

That brings us to perhaps the fund's most impressive stat, and the one advisers really need to keep their eyes on: its correlation to global equities.

Based on weekly returns through the third quarter, the most recent data available, the fund has a correlation of just 0.38 to the MSCI World Index and a correlation of 0.36 to the S&P 500. Correlations lower than 0.5 lead to better diversification and can lead to better risk-adjusted returns for the entire portfolio.

Today the fund is positioning itself to take advantage of the global economy's uptick in growth.

“Our biggest trade over the last couple months has been gearing up for continued economic growth,” Mr. Ebner said.

That means the fund is net long cyclical sectors such as retailers in the U.S. and financials in Europe.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 31

Conference

Spring Excell—Peak Advisor Alliance

Members of the InvestmentNews Research team will be presenting new adviser benchmarking data and providing strategies that can help accelerate the growth of your business. In this exclusive three-hour workshop, InvestmentNews will... Learn more

Featured video

INTV

BlackRock's Salim Ramji: What financial advisers want from portfolios now

Financial advisers are no longer looking at products individually, but instead want to know how they should be assembled in portfolios, according to Salim Ramji, head of BlackRock's U.S. wealth advisory business.

Latest news & opinion

DOL Fiduciary Rule: What you need to know about Acosta's decision

Labor Secretary Alexander Acosta confirmed that the agency's fiduciary rule will become applicable on June 9. Find out what advisers and firms should know when it goes into effect.

Acosta declines to extend delay of DOL fiduciary rule

Labor Secretary finds no legal basis to delay implementation; rule to become applicable June 9

Phyllis Borzi says opponents of DOL fiduciary rule face uphill climb to further delay or dilute it

Former assistant Labor secretary who crafted the rule says President Trump won't be able to get rid of it simply because he doesn't like it.

Advisers go on the offensive, getting clients ready for the next market correction

Some proactive planners are spelling out for clients the impact of a 10% or 20% correction.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print