Why L1 Capital's Long Short Fund still looks a good bet

The L1 Long Short Fund Ltd (ASX:LSF) is a new listed fund that offers investors global diversification.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of the biggest cash raisings this year came from funds management business L1 Capital who managed to raise $1.3 billion for its new L1 Long Short Fund Ltd (ASX: LSF) on the back of several years of delivering stellar returns for early investors.

In fact the original L1 Long Short Fund's annualised return of 36.8% a year to investors since September 2014 (according to the IPO prospectus) is what powered an exceptionally strong raising from investors probably hoping these kind of returns could be maintained.

However, L1's Long Short Fund has made the news lately due to its disappointing start with the exchange traded scrip today swapping hands for $1.83 after floating at $2 per share in April of this year. As such investors are down around 9% in a couple of months on the back of  a mildly disappointing start.

Over the short term markets can easily move against the best investors in the same way as they can sometimes unduly exaggerate positive returns if everything falls into place regarding an investor's timing.

As such it would pay not to place too much emphasis on L1's recent falls, as it was always likely to struggle to maintain annualised returns of 36.4% without observing proper risk management practices.

Hedge funds or "long / short funds" can commonly generate a lot of their alpha via short bets paying off, but the effect can reverse if the short bets move against them.

L1 Capital has made no secret of the fact it has bet against Tesla shares in the past and the electric car company's strong recent performance probably dented returns a little.

I'm also aware that the fund has successfully shorted private hospital operator Healthscope Ltd (ASX: HSO) in the past and its recent surge on the back of takeover bids may also have put a dent in L1's early performance.

L1's management team blamed the underperformance on the "recent surge" in growth stocks at the expense of value stocks that are favoured by the manager on the long side.

Foolish takeaway 

If I were an L1 Long Short Fund investor I wouldn't be troubled by the early performance of the fund as it has a strong investment team in place and impressive track record. Management are also heavily invested in the funds themselves which is as good a sign as any that they will be working hard to ensure healthy long-term returns. Moreover, a 9% fall today could easily swing to a 9% gain by April 2019 in which case the initial falls would be long forgotten.

Buying investment funds can generate strong returns, but the really big gains come about if you can pick and buy the individual stocks yourself that might be tomorrow's massive winners..

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »