BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
PERSONAL BUSINESS

A Bullish Fund That Also Shorts


Few mutual funds have ever made much by shorting stocks--and few try. The investment Establishment's mantra is buy and hold, and shorting is a short-term ploy. Besides, until a law change last year, onerous tax treatment of short sales for funds made the whole business unappealing. But now shorting looks a whole lot better, thanks to Montgomery Global Long-Short Fund.

The fund, launched in January, 1998, scored a 53.4% total return in its first year. It's up another 7.5% through Mar. 8. To make the fund more attractive, Montgomery axed its loads. But the expense ratio is high--3.53% including interest costs. For now, Montgomery is capping expenses at 2.35%.

Portfolio managers Nancy Kukacka and Angeline Ee run a similar hedge fund that was up 106.9% from June, 1996, through January, 1999, says Standard & Poor's Micropal. In the mutual fund, they can invest in the U.S. and other developed or emerging markets. They can go long, short, leverage with margin, and use derivatives--all of which they've done. They can also invest in bonds, which they haven't done.

The mutual fund is not for the perpetually pessimistic. ''We're long-biased, and we believe in the stock market,'' says Kukacka, who tends to developed markets while Ee focuses on emerging ones. Right now, the fund is about 65% long and 35% short. Some 62% of its longs and 33% of its shorts are U.S. stocks.

The fund scored big last year with long positions in telecoms--and the sector still makes up about 15% of the portfolio. Kukacka was also short U.S. small caps. That helped during the summer sell-off: From July to October, the fund lost 12.6% vs. 19.2% for the Standard & Poor's 500-stock index. Long positions in emerging European markets such as Greece paid off, as did shorting Asian financials.

Although the fund is small, the money is spread over some 250 positions. The largest--Securicor, a British cell-phone operator--is just 2.55% of assets, and the top 10 holdings amount to only 17%. Says Ee: ''We want to be very, very diversified, especially in the short positions.'' Why? A bad call on shorted stock can be much costlier than a bad long call.

Morningstar analyst Bill Rocco says long-short funds usually have a very low correlation to the S&P, which makes them good portfolio diversifiers. It's too soon to calculate Montgomery's, but he says Caldwell & Orkin Market Opportunity, a domestic fund that's been around for a while, has a 4% S&P correlation.

That fund is closed to new investors. And Montgomery plans to shut Global Long-Short's doors June 30. ''That's good, because a long-short fund has to be nimble,'' says Rocco. So must would-be investors. So if you want a piece of this fund, you only have a few months to move.

By Jeffrey M. Laderman
EDITED BY AMY DUNKIN

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