Demand for 130/30 Managers Remains Strong
The U.S.130/30 market could reach $500 billion in the next three years. That’s according to a recent survey released by Merrill Lynch reports Hedge World. Globally, the 130/30 market could hit $1 trillion by 2011. The survey confirms significant growth of 130/30 funds, or active extension strategies, thanks to the interest of institutional investors.
A Merrill Lynch survey of 160 U.S. institutional investors with combined assets under management of $1.5 trillion shows that nearly one-third of the institutional investors polled expect to begin or increase allocation to 130/30 strategies by the end of 2010, according to Hedge World. The research also finds that the majority of those new inflows will come from public pension funds.
Indexes are “capitalization” weighted. So, mathematically, much of the information in an active investment process is lost when applied against a capitalization-weighted index like the S&P 500 or the Russell 1000. As a result, the industry has introduced the 130/30 investment strategy, which uses the leverage and short selling strategies from the hedge fund industry to reduce the information loss of active strategies against large cap indexes.
130/30 means that an investment manager employs leverage to buy additional stocks or increase the weights of existing stocks to up to 130 percent of the current portfolio value provided the manager also shorts an equal value of stocks. Thus, the total market value of the portfolio remains at 100 percent. In other words, a 130/30 strategy goes 130 percent long and 30 percent short. In contrast, traditional portfolio managers are required to be fully invested or 100 percent gross long, with no leverage and no short selling.
In theory, the 130/30 approach should produce better results than traditional investment management because it mathematically increases the amount of active information that is retained in the investment process.
Today, nearly every asset manager, from mutual fund companies to banks, has developed 130/30 funds as customers seek out increased alpha, increased risk-adjusted returns, and cheaper alternatives to hedge funds. Thus, executive search firm, A.E. Feldman, reports that candidates seeking portfolio manager opportunities stand to benefit from learning more about this trend. The firm also notes that among the most prevalent concerns about hiring 130/30 managers is the candidates’ track records and ability to “short.” Demand for quantitative managers is also rising.
