Insights / March 20, 2023

White Paper: Wasatch Long/Short Alpha Fund

Giving Shareholders the Potential Benefits of Wasatch’s Company- Specific Insights While Seeking Protection From Many of the Risks That Come With Long-Only Growth Investing

On October 1, 2021, we launched the Wasatch Long/Short Alpha Fund—which is a mutual fund that takes a directional (long-biased) approach to long/short investing. The Fund’s objective is long-term growth of capital. Ticker symbols are WALSX for the Investor Class with a $2,000 minimum initial investment and WGLSX for the Institutional Class with a $100,000 minimum.

Mick Rasmussen, CFA, is the Fund’s Lead Portfolio Manager. Mick joined Wasatch Global Investors in 2014. He is a member of our U.S. investment team, and his long positions are often held by other Wasatch strategies and funds.

Since the Long/Short Alpha Fund began, it has disproportionately benefited from its short positions. The Fund’s most recent performance is available here: Wasatch Long/Short Alpha Fund


  • The Long/Short Alpha Fund gives shareholders the potential benefits of Wasatch’s company-specific insights while seeking protection from many of the risks that come with long-only growth investing.
  • Through our use of shorts to offset longs, our goal is to keep the Fund’s market exposure at about half that of the Russell 2500™ Index over a full investment cycle while limiting other sources of systematic risk.
  • Our aim is to optimize rather than maximize risk reduction, and this creates a bias toward growth and high quality.
  • On the long side, we pick U.S. stocks with the same bottom-up, fundamental analysis used in our long-only small- and mid-cap strategies and funds.
  • On the short side, we’ve developed highly quantitative methods—with qualitative overlays—to pick stocks that complement our long positions.
  • The most recent period since the market peak in late 2021 has been an excellent time to demonstrate the value of our Long/Short Alpha approach, which was developed purely by Wasatch.


As a learning organization for almost 50 years, Wasatch Global Investors continually strives to improve the investment decisions for all of our strategies and funds. Moreover, when we launch a new strategy or fund, we only do so if we’d willingly invest our own money in it and if we already have the resources to manage it properly. With that as background, we’re extremely excited about the Long/Short Alpha Fund—which employs an approach that was developed purely by Wasatch.

Part of our process of continual improvement includes researching and developing quantitative methods that might enhance performance. Although we decide which companies we like based mostly on bottom-up, fundamental analysis, we’ve found that multi-factor quantitative methods can support portfolio-management decisions like entering and exiting positions, sizing portfolio weights, achieving proper diversification and trading efficiently.

Once we developed our data-driven quantitative methods to enhance the performance generated by the stocks held in our existing strategies and funds, we realized we could use these same methods—plus further refinements—to pick stocks for short sales. Additionally, we could specifically select these shorts to reduce risk and complement our stocks purchased on the long side.

That’s why we launched the Long/Short Alpha Fund. Mick Rasmussen, the Fund’s Lead Portfolio Manager, has been with Wasatch Global Investors since 2014. He’s supported by all of the Wasatch research teams.


The Wasatch Long/Short Alpha Fund invests primarily in U.S. small- and mid-cap companies with market capitalizations greater than $2 billion at the time of purchase. Through our use of short positions (shorts) to offset long positions (longs), our goal over a full investment cycle is to produce a portfolio beta of about 0.5 relative to the Fund’s benchmark, the Russell 2500™ Index. This means we try to keep the Fund’s market exposure (calculated for a full investment cycle) in the vicinity of about half that of the benchmark.

Why do we focus on small- and mid-cap companies? As one of the most experienced managers of small-caps, Wasatch has tremendous insight and expertise in this investment universe. We like the potential for strong revenue and earnings growth, combined with the underappreciated prices, that can be found among small-caps. We also see great opportunities among mid-caps, as our favorite businesses often still have meaningful upside even after they move beyond the small-cap threshold. Moreover, some of the most disruptive growth companies are now going public when they’re higher up on the market-cap spectrum.

Due to our pursuit of lower volatility and lower risk, we don’t necessarily expect the Fund to outperform the benchmark during rising market environments. What we do expect, however, is for the Fund to generally hold up better amid negative conditions. And upon completion of a full investment cycle, we’d be pleased if the Fund achieved over 80% of the benchmark’s full-cycle return while incurring 50% or less of the periodic downturns.

Years ago, long/short approaches were only offered through hedge funds and limited partnerships. But today’s long/short mutual funds provide shareholders with more transparency, smaller minimum purchases, lower fees and daily liquidity. In addition, mutual funds are subject to regular audits and greater regulatory scrutiny than hedge funds and limited partnerships. This may increase the comfort level for shareholders who seek to reduce overall portfolio volatility and risk by adding long/short mutual funds.


Before describing the details of the Wasatch Long/Short Alpha Fund, we need to provide some background. For complete descriptions of long-only investing, long/short investing and short selling, see the DEFINITIONS section below. At a basic level, a long/short approach is executed in two alternative ways—market-neutral investing or directional investing.

Market-neutral investing is where long positions are completely offset by short positions. Through this approach, the portfolio manager attempts to generate gains from the outperformance of the longs relative to the shorts while being “neutral” to overall market movements.

Directional (long-biased) investing—which is what we employ at Wasatch—is where longs outweigh shorts, and the shorts are simply intended to reduce some of the overall market risk.

In terms of market exposure, it’s important to define gross exposure versus net exposure. Gross market exposure is the sum of the long weighting and the short weighting. Net market exposure is the long weighting minus the short weighting. So, for example, if the Fund were 120% invested in long positions and 40% invested in short positions, the gross market exposure would be 160% and the net exposure would be 80%.

At Wasatch, we generally confine our comments on the Fund’s exposure to the gross percentage because we don’t think the net percentage properly reflects the Fund’s sensitivity to the market.


As mentioned above, we employ a directional (long-biased) approach to investing for the Wasatch Long/Short Alpha Fund. The Fund’s long weighting will typically range from 90% to 140% in 30 to 60 stocks, and its short weighting will span from 0% to 60% in 0 to 60 stocks. The Fund’s gross market exposure will generally be anywhere from 90% to 200% in 30 to 120 stocks total. We expect that the Fund’s most common weightings will be around 130% long and 50% short, which translates into market exposure of 180% gross.

Again, our goal over the long term is to achieve greater than 80% of the Russell 2500 Index’s return with about 50% of the market exposure (a beta of approximately 0.5). In seeking such performance, we expect to make relatively frequent transactions in the Fund—which are likely to produce an annual portfolio turnover rate of about 50% to 100%.

When is the Fund expected to have the greatest gross market exposure? As described more fully below, we generally want to have very significant gross exposure when the expected market return is lower. This often occurs near market peaks when stock valuations are stretched. A maximum gross exposure will typically mean that we also have a large short weighting that’s positioned to perform well if stocks decline.

Conversely, we generally want to have a lower gross exposure when the market has a higher expected return. This often occurs following large market selloffs when stock valuations are relatively inexpensive. A lower gross exposure will typically mean that we’re well-positioned on the long side with stocks poised to rise—while we also have a very small short weighting, as there’s less need to seek protection from market risk.


Shareholders in a long-only fund gain exposure to some combination of general market performance and the stock-picking skill of the portfolio manager. At the other end of the spectrum, a market-neutral fund seeks to eliminate most of the general market performance and only retain the stock-picking skill.

Our approach with the Wasatch Long/Short Alpha Fund is somewhere in between this investing spectrum and is significantly different from that of a market-neutral fund. Because the stock market tends to rise over time, we always want to maintain some exposure to general market performance. That said, we also want to have high exposure to what we think is our best and most repeatable source of return—stock picking.

Another distinction is that the Long/Short Alpha Fund is significantly different from an index fund. An index fund seeks to replicate the general market performance of the index, with no effects from stock picking by a portfolio manager. What we seek with the Long/Short Alpha Fund is a high level of idiosyncratic performance—that is, performance not tied to the general market. For example, over the long term, a biotech company can be very idiosyncratic because the performance of its stock is overwhelmingly tied to drug efficacy.

If we’re effective at varying our long and short weightings, and at buying the right stocks and shorting names that are good offsets to our long positions, the Fund should generate alpha—which is risk-adjusted (beta-adjusted) outperformance relative to the Russell 2500 Index. For explanations of alpha and beta measurements as well as other terms, see the DEFINITIONS section below.


This brings us to how we pick stocks.

On the long side, we pick U.S. stocks using the same bottom-up, fundamental analysis we use for our small- and mid-cap strategies and funds. More specifically, we strive to invest in companies with high-quality characteristics—which include significant returns on capital, relatively low debt, great management teams, expanding markets, and innovative products, services and business models. We also look for strong growth, which we define as the potential to roughly double revenues and earnings within the next five years or so.

We’re reluctant to compromise on quality and growth because we believe these conditions give us the confidence to stick with our holdings during all market environments—regardless of short-term trends. While our quality and growth forecasts generally look out over the next five years or so, our analysis of company fundamentals is based most heavily on the past three years.

Almost all of the long positions held in the Wasatch Long/Short Alpha Fund are also held in other Wasatch strategies and funds. Another important point is that the Fund’s stocks must provide appropriate diversification across sector, industry, market cap, revenue- and earnings-growth rates, profitability, indebtedness, economic cyclicality, inflation and interest-rate sensitivity, momentum and volatility. As for sizing, long positions often carry portfolio weights of approximately 2.5% at the time of purchase.


On the short side, we’ve developed highly quantitative methods—with qualitative overlays—to pick stocks that complement our long positions, meaning they’re tailored to work with our long positions based on investment style and the factors mentioned above. For example, if we have significant long exposure to software companies, we’ll offset that exposure with short positions in what we believe are less attractive software names. In doing so, we’ll attempt to buffer some of the software group’s overall performance—which should mean that the remaining return is a better reflection of our ability to identify the best businesses and management teams.

Short position portfolio weights are usually in the vicinity of 1.0% and are almost never allowed to run past 2.5%. Another risk-control measure we have for our short positions is that we generally avoid heavily shorted names—which we define as stocks where more than 20% of the outstanding shares are sold short by other investors.

Perhaps one of the best ways to understand how we pick short positions is to describe what we don’t do. In the past decade, some long/short managers got into trouble by going long on value stocks and going short on growth stocks. This proved disastrous because value stocks underperformed and growth stocks outperformed. In other words, these managers were wrong on both the long side and on the short side.

To help determine the Fund’s short weighting, we use four main indicators—two of which are valuation indicators and two of which are momentum indicators:

  • Relative valuation of the Russell 2500 Index compared to its long-term history.
  • Valuation spread from the most to the least expensive companies in the Russell 2500.
  • Percentage that the Russell 2500 is off from its trailing 12-month high.
  • Number of weeks since the Russell 2500 hit its trailing 12-month high.

When the Russell 2500 Index is particularly expensive or is closer to its trailing 12-month high, we tend to have a larger short weighting. The process of short selling generates additional cash in the Fund, and while we usually invest some of that cash in long positions, we ensure that incremental short weights exceed incremental long weights when Russell 2500 valuations are stretched.


For our part, we’re growth-oriented investors—so our long positions tend to be growth stocks. If we were to short value names, we could get hammered in a value-oriented rally as both our long positions and our short positions could go against us. Instead, we short growth stocks that we think are vulnerable. More specifically, we short growth names that we believe are of lower quality than the growth stocks we hold as long positions.

This doesn’t mean that our short sales will always work perfectly. There are certainly times when low-quality stocks outperform high-quality names. But we think this risk is mitigated by our directional long bias and by our track record of succeeding with high quality over extended periods.

Additionally, we’ve found that when low-quality stocks beat high-quality names, it’s often at the same time that the market is rallying strongly. This means the Fund is likely to underperform in a speculative up market. But that’s OK with us because our goal is to outperform in a down market even if we lag when the market is rising.


Our long positions are based primarily on our bottom-up, fundamental analysis of U.S. small- and mid-cap companies. While this analysis is mostly qualitative, we’ve developed some quantitative methods to aid our decision making. Our short positions, on the other hand, are mostly determined by our proprietary quantitative methods—supplemented, of course, by some qualitative assessments.

It’s important to note here that for our qualitative and quantitative methods on the long and short sides, all of our underlying research is proprietary and is generated internally by Wasatch. While we do obtain research reports and data from external sources, we don’t rely on third-party analytical systems.

We expect our longs to generate more idiosyncratic performance than our shorts. In other words, our stock-picking skill should be more evident in our long positions. Our shorts are used primarily to hedge risk exposures against our specific longs. Since we’re largely interested in our shorts for their market sensitivity, they tend to be lower on the market-cap spectrum, more speculative and more volatile. To reduce the impact of any one short position going against us, our shorts are usually held in much smaller sizes than our longs.


As longtime Wasatch shareholders may know, we often describe ourselves as “macro aware” rather than “macro driven” investors. This means we’re certainly aware of macro forces, but they don’t generally drive our investment decisions—to overweight or underweight sectors, for example. Having said that, macro forces do influence our investment decisions if their effects are discernable in our bottom-up, fundamental analysis of companies.

In the Long/Short Alpha Fund, we make our stock picks on the long side using a “macro aware” approach. But our short weighting is more “macro driven” and uses additional quantitative factors. What’s interesting, though, is that despite its increased attention to macro indicators, the Long/Short Alpha Fund is probably the least sensitive to the macro environment compared to all the equity strategies and funds in the Wasatch lineup. The reason is that the Long/Short Alpha Fund uses its macro indicators in an attempt to increase alpha and reduce exposure to general market performance. Another way to think about this is that we want to identify the macro risks in an effort to lessen the effects of such risks.

So, is the Fund right for you? It could be if you want a generally increased level of exposure to Wasatch’s small- and mid-cap stock picking with a generally reduced level of exposure to overall market fluctuations. In other words, the Fund gives shareholders the potential benefits of Wasatch’s company-specific insights while seeking protection from many of the risks that come with long-only growth investing.

The Fund maintains much of Wasatch’s historical revenue- and earnings-growth orientation but reduces this “style” factor to a significant extent. On the other hand, you should understand that one of the least favorable environments for the Fund will likely be when high-quality growth is out of favor in the stock market.


Thus far, we’ve described the primary elements of the Wasatch Long/Short Alpha Fund. But there’s just a bit more to be said regarding how we put these elements together.

From our perspective, portfolio-management decisions for the Fund fall into three main categories:

  • Long weighting, short weighting and gross market exposure.
  • Sector and industry exposures.
  • Other factor exposures (e.g., market cap, revenue- and earnings-growth rates, profitability, indebtedness, economic cyclicality, inflation and interest-rate sensitivity, momentum and volatility).

In each of these three categories, we attempt to adjust the Fund’s risk. Broadly speaking, the long weighting, the short weighting and the gross market exposure are determined by momentum and valuation indicators. Sector and industry exposures are driven by bottom-up, fundamental analysis of individual companies and proprietary diversification models. Other factor exposures result mostly from company-specific analysis, subjective management rankings and quantitative measures.

Again, our goal isn’t to maximize risk reduction. Instead, our goal is to optimize risk reduction across the many factors referenced above. In general, attractive returns aren’t possible without some level of risk. And we believe our insight into company-specific fundamentals provides our best and most repeatable risk-adjusted source of returns, so we overemphasize this Wasatch-specific exposure.

To summarize, we think there are three major characteristics of the Wasatch Long/Short Alpha Fund. First, the Fund attempts to reduce market exposure (beta). Second, the Fund seeks to increase the portion of returns coming from stock selection (alpha). Third, the Fund tries to preserve a high-quality growth orientation but lessen the effects of investment styles coming in and out of favor.

In closing, we’d like to reiterate that since the Long/Short Alpha Fund began on October 1, 2021, it has disproportionately benefited from its short positions. The Fund’s most recent performance is available here: Wasatch Long/Short Fund.



Equity investing involves risks, including potential loss of the principal amount invested.

Short selling incurs significant unique risks, including potentially unlimited downside risk, high short-sale related expenses and unavailability of securities to sell short, among others, all of which could negatively impact the performance of the Fund. Additionally, the Fund may not be able to borrow the securities it intends to sell short.

Because the Fund invests in both long and short equity positions, the Fund has overall exposure to changes in the value of securities, which far exceeds the value of the Fund’s assets. This may magnify gains and losses and increase the volatility of the Fund’s returns. Investment in the Fund will involve market risks associated with different types of investment decisions than those made for a typical “long only” fund. There is no guarantee that the use of long and short positions will succeed in limiting the Fund’s exposure to market movements, sector swings or other risk factors.

Being non-diversified, the Fund can invest a larger portion of its assets in the stocks of a limited number of companies than a diversified fund can. Non-diversification increases the risk of loss to the Fund if the values of these securities decline.

An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit or call 800.551.1700. Please read the prospectus carefully before investing.

Portfolio holdings are subject to risk and may change at any time. Securities in the Fund are generally added to the portfolio as long or short positions based upon security rankings provided by multi-factor quantitative models and on fundamental analysis of securities. The reliance on quantitative models entails unique risks, including the risk that a model may be limited or incorrect, the risk that the data on which a model relies may be incorrect or incomplete and the risk that the Advisor may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Fund’s portfolio. The Advisor will generally sell a security if, among other things, the rankings provided by the quantitative models decline and/or research analysis reveals deterioration in company fundamentals.

Wasatch Advisors LP, trading as Wasatch Global Investors ARBN 605 031 909, is regulated by the U.S. Securities and Exchange Commission under U.S. laws which differ from Australian laws. Wasatch Global Investors is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia.

The Wasatch Long/Short Alpha Fund’s investment objective is long-term growth of capital.

Wasatch Advisors LP, doing business as Wasatch Global Investors, is the investment advisor to Wasatch Funds.

Wasatch Funds are distributed by ALPS Distributors, Inc. (ADI). ADI is not affiliated with Wasatch Global Investors.


Alpha is a risk-adjusted measure of the so-called “excess return” on an investment. It is a common measure of assessing an active manager’s performance as it is the return in excess of a benchmark index or “risk-free” investment. The difference between the fair and actually expected rates of return on a stock is called the stock’s alpha.

Beta is a measurement of a fund’s trailing return in relation to the overall market (or appropriate market index). A beta of 1 indicates the share price will typically move with the market. A beta of more than 1 indicates the share price will typically be more volatile than the market. A beta of less than 1 indicates the share price will typically be less volatile than the market.

Diversification does not eliminate the risk of experiencing investment losses.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

Long-only investing is the typical approach of buying stocks for a portfolio.

Long/short investing is an approach in which a portfolio manager buys some stocks but also sells some shares short (see short selling).

Short selling is the process in which a portfolio manager borrows shares of a stock and then sells them on the open market. If the shares then fall in price, the manager can repurchase them at the lower price and return them to the lender. That would net a profit for the portfolio manager because the manager sold the shares for more than the repurchase price. Clearly, this is the goal of short selling. But there’s always the risk that the share price could rise and generate a loss for the portfolio manager.

Return on capital is a measure of how effectively a company uses the money, owned or borrowed, that has been invested in its operations.

Valuation is the process of determining the current worth of an asset or company.

The Russell 2500 Index is a market-cap weighted index that includes the smallest 2,500 small- and mid-cap stocks covered in the broad-based Russell 3000 Index of U.S.-based listed equities.

The Wasatch Long/Short Alpha Fund has been developed solely by Wasatch Global Investors. The Fund is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies. All rights in the Russell 2500 vest in the relevant LSE Group company which owns the Index. The Russell 2500™ Index is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. TMX™ is a trademark of TSX, Inc. and is used by the LSE Group under license. The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Fund or the suitability of the Index for the purpose to which it is being put by Wasatch Global Investors.

Indexes are unmanaged. Investors cannot invest in this or any index.