Rady Assets

Tip Sheet: Rady Contrarian Long/Short Remains Focused On Risk

14 April 2010 - Dow Jones Newswires - Jennifer Cummings 

NEW YORK (Dow Jones)--Unlike many players in the market, the Rady Contrarian Long/Short Fund (RADIX) doesn't have a short-term memory when it comes to managing risk.

As the trauma of the economic crisis begins to fade, many investors have been moving into stocks that offer short-term growth, but weak long-term value. But the Rady Contrarian hasn't been getting distracted by momentum stocks and has remained focused on top-tier companies that have sustainable business models.

"We don't forget--that's our job," portfolio manager Harry Rady said.

The Rady Contrarian is part of an alternative breed of funds that go both long and short on stocks, a strategy that adds a layer of diversification to the fund's portfolio. Also, since short stocks tend to be less correlated to the broader market, they can help lower the volatility of a portfolio.

The fund's devotion to risk management has cost it a bit during the economic recovery. It underperformed the S&P 500 by 9.2 percentage points in 2009, and is about 7.4 percentage points below that index year to date, as of Tuesday's close.

However that weakness came after the fund trounced the markets in 2008, outperforming the S&P 500 by 24.2 percentage points. Meanwhile, the fund beat Hedge Fund Research's HFRX Equity Hedge Index, which Rady uses as a benchmark for his fund, by 4.1 percentage points in 2009 and 12.6 points in 2008.

Long-short funds have become increasingly popular since the financial crisis helped investors appreciate the benefits of hedging their portfolios, Morningstar hedge-fund analyst Benjamin Alpert said. Meanwhile, investment scandals, like the scheme perpetrated by Bernard Madoff, have made the relative safety of a regulated product like a mutual fund look more attractive than hedge funds, Alpert added.

Until just a few months ago, the Rady Contrarian was a hedge fund. Rady decided to take it public to give his investors the benefit of daily liquidity, meaning they can change their stake at any time, unlike hedge funds, which typically offer infrequent redemption periods. He also wanted to give smaller investors the opportunity to enter the fund.

Those benefits required a few sacrifices. For one, the transparency that comes with being a mutual fund means that investors may try to get involved in the day-to-day performance of the fund, said Rady Asset Management's Chief Operating Officer Jordan Greenhouse. Also, mutual funds have more restrictions than hedge funds on the amount of leverage they can use. But since the Rady Contrarian invests using little or no leverage, this restriction doesn't impact the portfolio, Greenhouse said.

Among Rady's current favorite picks are companies with exposure to nuclear power, like NRG Energy Inc. (NRG). He likes the industry's high barriers to entry since it takes such a major time and financial commitment to develop nuclear assets. And with natural gas prices low right now, nuclear power is being viewed by the markets as less attractive.

"At today's prices you could be buying nuclear assets at 50 cents on the dollar," Rady said.

The slumping natural gas price has also attracted Rady to companies that have exposure to that commodity, like Chesapeake Energy Corp. (CHK) and Petrohawk Energy Co. (HK).

Rady said he's aware of the broad expectation that natural gas prices will remain depressed for a while due to oversupply. But with many of the stocks down 70% year to date, he thinks investors in these companies will "get paid for the risk."

Rady doesn't expect his fund's recent underperformance against the S&P 500 to last, saying the markets will likely get choppier now that the valuations of low-quality stocks have been stretched to their breaking points.

"Now is the time for long-short managers to shine," he said.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Contrarian Long/Short Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 877.302.7239. The prospectus should be read carefully before investing. The Contrarian Long/Short Fund is distributed by Northern Lights Distributors, LLC member FINRA/SIPC.

Harry Rady’s  “favorite picks,” should not be considered investment advice.