1) The document describes a long-short investment strategy that aims to build a market-neutral portfolio consisting of long positions in stocks with improving fundamentals and short positions in the Euro STOXX 50 Future. 2) The strategy has achieved positive returns during negative market months and preserved capital during positive months, reaching a nice balance. 3) Over time, the long-only portion of the strategy has exhibited lower beta characteristics than the market index, causing the long-short strategy to take on an unintentional negative beta posture by shorting more futures. However, this positioning helps preserve capital during downturns.

1. COMMENTARY, end of May 2017
Our long-short strategy has the objective of building a ‘market-neutral’ (possibly, ‘beta neutral’) portfolio.
This portfolio is made up of a long-only basket (‘the cheapest quality portfolio of stocks with improving fundamentals
available’) and short the Euro STOXX 50 Future. So, one way we use to judge its track record is to compare it to the
performance of the long-only portfolio and that of the index.
In the graph below we show the monthly returns (%) of the long short strategy, the EURO STOXX 50 Index and our long
only strategy.
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Long Only 0.3 8.2 7.5 2.8 0.5 2.2 -3.0 4.3 -5.8 -3.8 9.8 4.1 -3.6 -8.0 -0.6 4.1 0.5 3.6 -6.4 5.4 1.3 0.5 -0.9 0.5 4.0 0.0 4.8 3.6 4.4 1.3
SX5E Index -3.2 6.5 7.4 2.7 -2.2 -1.2 -4.1 5.2 -9.2 -5.2 10.2 2.6 -6.8 -6.8 -3.3 2.0 0.8 1.2 -6.5 4.4 1.1 -0.7 1.8 -0.1 7.8 -1.8 2.8 5.5 2.0 1.3
Mar-Neut. 3.2 1.5 0.8 -0.5 1.9 2.1 0.2 -0.3 2.9 1.1 -0.1 1.0 2.3 -1.4 1.9 1.6 -0.6 1.2 -1.2 1.6 0.1 1.0 -2.3 0.5 -2.1 1.0 2.2 -0.4 0.2 0.5
Monthly returns (%)
Long Only SX5E Index Mar-Neut.
We can see that during strong up-markets, our long only strategy (in BLUE) is able to maintain the run but it is during
the corrections that it builds the most ‘alpha’, losing less than the market (the Euro Stoxx 50, in RED), hence showing
some ‘defensive’ characteristics, even if it is not a low beta strategy by design.
How the long short portfolio has performed during different times
We want to see how the long short strategy has reacted to small and big movements in the underlying market, either
up and down.
So, we have taken rolling 1 month (%) total return observations in the index and we have segmented it into 4 quadrants:
- ‘low vol’ --> [-4% < change in 1 month rolling total return < 4%]
- ‘panic’ --> [change in 1 month rolling total return > 4% or < -4%]
- ‘up’ --> positive returns
- ‘down’ --> negative returns
These are the results:
down up
panic 1.18 0.28
low vol 1.19 0.52
It seems that so far we have reached a nice balance between preservation of capital during up months and positive
results during negative months. In fact:
- in a 'low volatility environment' the market neutral strategy has delivered 1.19% on average when the sign is negative,
0.52% when the sign is positive;
- in a 'high volatility environment' (more than 4% in absolute 1 month rolling return for SX5E) the strategy has delivered
1.18% on average when the sign is negative and 0.28% when the sign is positive.
Why we haven’t been beta neutral
During these two and a half years, the long only strategy has shown an ‘ever growing’ lower beta characteristics than
the index

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BETA
Rolling 6m. Beta (long-only portfolio) vs SX5E
Beta Long-Only
and, as a result, in the long-short strategy, we have found us shorting too many Euro Stoxx futures, causing a systematic
'negative beta posture':
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% long portfolio hedged
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BETA
Rolling 6m. Beta (long-short portfolio) vs SX5E
Beta
However, while unintended, we are glad to maintain that positioning as we struggle to find deeply undervalued
securities and our objective remain to preserve capital during negative equity markets.
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