The long and short of alternative equity strategies

Common misconceptions lead investors to shun alpha-driven strategies that can have a timely place in portfolios, says Loomis Sayles’ Richard Geller 

Hedge funds have been popularised as high-risk strategies, cooked up in darkened corners and sprinkled with market-beating pixie dust.

While this media-fed characterisation is clearly a distortion, it is nevertheless true that some alternative strategies contend with myths which create investor confusion.

“The myths obfuscate the utility function of all good alternative strategies – as an alpha contributor to portfolios while offering strong downside protection,” says Richard Geller, Global Head of Alternative Investments within the GES team at Loomis, Sayles & Company.

The myths also create an illusion of homogeneity and obscure the fact that every alternative strategy differs – whether by strategy, style, or manager type.

Let’s be clear

“Not all long-short strategies are created equal and that is often not clear to investors,” says Richard. “What most investors want is a portfolio governed by transparent and intended behaviours that confer expected financial benefits to them.”

Long-short strategies run by the GES team at Loomis Sayles, itself an affiliate of Natixis Investment Managers, are active funds which have more tools than standard long-only funds in order to add alpha over a variety of market environments.

Richard adds: “Most investors describe the world today as increasingly complex and they perceive markets as difficult to navigate. And yet they know they need to own equities.”

The aim of the GES team’s long-short strategy is to use research and investment skill to generate returns from equities over cycles and over the long term, while limiting negative impacts on investors’ wealth. 

Three key legs support this approach:

1. Proven capability of producing alpha over the long term
2. Generation of alpha from shorts
3. Protection of capital in down markets, be they large or small

“These three legs support the stool,” says Richard. “It is no simple matter to produce all three, but you need them all or the stool cannot stand.”

The stability of the approach enables investors to access equity beta in a reliable way that increases their propensity to remain invested over the long term. Evidence has shown that remaining invested in very differentiated and strong businesses without breaks is critical to long-term investing success.

That is, full and long-term participation in great companies creates the compounding effects that increase wealth.

Alpha isn’t a given

Sustainable alpha may be the goal for any supercharged portfolio, but what exactly is it?

“Alpha is ultimately what you are trying to achieve by employing an active manager,” says Richard. He goes on to explain that alpha is investment return that is unexplained by market performance, adding: “The pursuit of alpha is our whole goal as an organisation”.

Alpha is decidedly not the result of factor-based investing, which often relies on macroeconomic trends or style trends. These trends can deliver exciting short- or medium-term performance, but returns due to external factors can reverse at any time, meaning investors are at the whim of markets.

“We try to generate equity market-like returns with a low beta profile while defraying factor risk exposure,” says Richard.

A sizeable portion of returns from alternative strategies, and from active management generally, is attributable to factors rather than genuine manager skill. But investors pay active managers for security selection and the management of risk, not access to factors.

“If you own stocks with the right combination of factors you might make money,” Richard adds. “Investors can, of course, take factor risk if they believe in the power of a certain factor, but they should pay passive – not active – fees for this.”

Exceptional companies, irrational pricing

For the Loomis Sayles GES team, the building blocks of long alpha are companies that are capable of sustaining their growth trajectory for long periods of time.

Richard says: “Empirically, fewer than 1% of publicly traded businesses are able to sustain competitive advantages, evidenced by durable, profitable long-term growth beyond a decade.”

These companies are usually known to many market participants but are secularly mispriced because of short-term focus. But markets are reliably volatile and patient investors will always have opportunities to buy good companies at undervalued prices instead of selling them.

How? Because market participants have a tendency to run for cover on hearing bad news or to crowd trades due to misplaced optimism amid strong markets. The consequent mispricing create opportunities for active, long-term, valuation-driven investors – such as GES.

Catalysts for mispricing are many and often come in the form of quarterly returns which miss consensus expectations. Amazon, as an example, is widely recognised as a great business with a wide moat, yet every now and then has a bad quarter and has experienced meaningful price declines with some regularity over the last 13 years since the GES team has run its long-short growth equity strategy

Often there is a rational reason for below-consensus short-term numbers – with capital expenditure often one such reason. Richard says: “Meta was one of the worst-performing stocks in the index in 2022 – down more than 64% for the year – and the worst performer in our portfolio over that annual period. The stock came under pressure from investors dubious of its substantial spending on the Metaverse as well as concerns over how its advertising business would fare amid Apple’s new privacy rules.

Furthermore, as has happened with some frequency over its life, Meta experienced a short-term headwind related to capex associated with a strategic transition to a new product format – in this instance, short form video.

“What was being incorrectly viewed by the market as permanent negatives, we viewed as transitory and/or consonant with the long-term focus and strategic vision of management,” Richard continues. “We took this pullback as an opportunity to meaningfully add to our existing holding at levels that we considered to be extremely favourable on a reward-to-risk basis. Over 2023, Meta rebounded roughly 194% and was the top contributor to our portfolio.”

These examples highlight the fact that inefficiencies can and do occur in pricing for even the most well-known, large-cap names, providing opportunities to fundamental, active investors who have the discipline to be patient.

Diamonds and dogs

The ability to deploy shorts helps GES to create an overall beta profile of 0.39 in its long-short portfolio (compared a beta of 1 for an indexed or classically fully invested long-only portfolio).

When markets are moving upwards, few investors pay regard to beta. But beta suddenly becomes an urgent matter when markets crater.

Richard reveals that historically, during periods of S&P 500 decline the Long Short Growth Equity strategy has routinely maintained a very low market beta, even approaching neutral in certain instances. This means while it is able to capture meaningful value in rising markets, the strategy has been much less exposed to down markets than passive or high beta funds.

Furthermore, from inception to second quarter 2025, the portfolio has delivered 4.58% of net alpha, of which 55% has come from shorts. This despite shorts representing only around one-third of the overall balance sheet, which is generally run 100% long by 50% short.

The shorts are identified from the same research and analysis process which identifies alpha in the long positions. Richard says: “We are not doing anything different in our processes to identify and execute short positions. Rather, shorts represent the counterfactual and capitalize upon the negative selection stemming from our analysis. This is true despite the fact that we don’t trade pairs.”

Most investment strategies will simply omit the worst-performing companies, along with a large number of other companies that do not make the cut to be included in the portfolio.

However, this is not an active decision, as Richard explains: “The opportunity to comment on the deficiencies of a business is a direct result of our analysis to find the best companies. We don’t just ignore the bad, we actually harness it”.

Downside protection

Harnessing alpha is only part of the role that shorts perform in the portfolio. In fact, shorts do double duty, acting as a source of alpha and also hedging market exposure in order to protect capital. This downside protection means that investors often feel more comfortable holding volatile equities.

In the GES team’s view, reducing exposure and pulling money out of markets is not a sufficient hedge. Richard says: “Reducing net exposure is not sufficiently active and will not protect adequately investor wealth in downturns. There should not be a fee for simply reducing market exposure, investors can do that for themselves by simply holding cash.”

Investors in the GES long-short strategy have been meaningfully protected in the three worst market declines over the life of the portfolio. Capital preservation in those periods has, in turn, had a positive effect on compounding.¹

How? Because many investors pull some or all of their money out of markets during downturns, thereby missing the subsequent upturns. A properly hedged portfolio substantially reduces the likelihood of money being withdrawn at just the wrong moment in time and thus contributes to long-term compounding.

Fewer surprises equals better investor decisions

Although downturns are less frequent than up markets over time, when they occur, they can be damaging to both investor morale and net worth. A perennial allocation to an active long-short portfolio can prevent such damage.

As Richard puts it, “A meaningful and persistent allocation to a long-short strategy is a good way for investors to position themselves to ride out the inevitable cycles of the markets”.

A key goal of the long-short portfolio is consistency of intended behaviours. Richard continues: “Because we consider it an impossible task to predict markets, our goal instead is to aim for reliable behaviours tied to our philosophy and process as well as our structural approach to risk management. Over the strategy’s 13 years, we have delivered outcomes consistent with our goals: returns similar to that of the long-term performance of the S&P 500; less than market beta – ITD annualizing less than 0.40 – risk mitigation during both large and small declines in the index, and meaningful alpha.”

This reliability of behaviours increases the likelihood that investors are not surprised by outcomes and stay invested over time. This is particularly relevant to individual investors.

The portfolio is a viable alternative to a 60:40 allocation of equities and bonds. In the past, the traditional 60:40 split reduced downside risk, given that the prices of stocks and bonds largely moved in opposite directions. But that correlation is less reliable than in the past, leaving investors disappointed with the hedging part of their portfolios.

“In short, many asset allocation models don’t work as reliably or as effectively as in the past, so investors need more tools,” says Richard. “We believe long-short strategies are key portfolio tools. But for investors to realise that we need to communicate the strengths of specific long-short strategies and dispel those lingering myths.”

Written in August 2025