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
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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.

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