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130/30 Strategies Not Just a Fad

Date: Monday, September 10, 2007
Author: Maggie Shea, Financial Correspondent, Hedgeworld.com

NEW YORK (HedgeWorld.com)—A majority of investors said they consider 130/30 strategies to be a new investment paradigm with long-term potential, as opposed to a passing trend. Furthermore, nearly half of investors currently implement 130/30 strategies or hope to do so within the next year, according to a new survey conducted by business media firm Terrapinn Ltd. and hedge fund blog AllAboutAlpha.com.

The recent study polled 135 institutional investors, asset managers, consultants and service providers from North America, Europe, Latin America, Asia, Africa and Australia on their attitudes toward these hybrid investment strategies. Most of the survey respondents were asset managers (47%) and investors (29%), and most are based in the United States and Asia.

Around 16% of asset managers polled in the study said they currently offer 130/30 vehicles; another 26% said they planned to offer them within the next year. A 130/30 strategy is one in which a manager goes long using 30% leverage (130%) and then shorts the same amount, which gives the portfolio a total net market exposure of 100%. As the strategy has grown in popularity, managers now offer variations, from 120/20 funds to 150/50 funds, depending on how many bets the investor wants to take. Consultants also have been busy in response to growing demand for information about 130/30 strategies—25% of the consultants who responded to the survey said they are actively researching and advising on 130/30 funds.

Around three-quarters of asset managers who responded said that 130/30 funds allow investors to access more alpha sources without the characteristics of a hedge fund. On the other hand, 70% of investors ranked the "higher information ratio" of 130/30s as their main source of interest in the strategies.

Almost 70% of investors responding to the survey said the biggest challenge they face with 130/30 funds is selecting a manager. Other issues cited were the fund's relationship with the prime broker, determining the amount to sell short and board approval shorting. Around 45% of asset managers who responded said board approval short selling was the biggest challenge—about 30% cited finding a manager as the biggest challenge.

Although 130/30 strategies aim to provide the best of both the hedge fund and long-only worlds, nearly half the investors who responded said they don't have imminent plans to invest in 130/30 strategies, with around 70% of that group saying they aren't convinced of the merits of 130/30s. Around 30% of investors not using 130/30 strategies said they prefer to find short exposure from direct investments in hedge funds. Further, nearly 60% of asset managers who responded to the survey said they think investors are concerned about 130/30 funds because of fears about the manager's shorting skills.

Indeed, some are skeptical about 130/30 strategies' narrow shorting ability. In a May posting on his blog Information Arbitrage, Roger Ehrenberg, president of research firm Monitor 110, wrote of 130/30 funds: "Can someone, anyone, please tell me what the big deal is here? Is it a mutual fund with a limited ability to go short and use a little leverage to amplify the risk/reward profile of the fund's bets? Or is it a hedge fund with an unusually restrictive document?" He added that a manager who is good at picking shorts shouldn't manage a portfolio that caps the ability to short Previous HedgeWorld Story.

Nevertheless, when asked why they developed 130/30 offerings in the first place, more than 60% of asset manager respondents said they did so to gain a competitive advantage. More than 50% said they are offering 130/30 products to gain an advantage over long-only strategies.

So, are 130/30 strategies entering the mainstream? The survey providers seem to think so, saying that 130/30 "represents a quintessentially ‘alpha-centric' approach to traditional investing … and a pragmatic strategy for hedge funds to gain a foothold in the much larger long-only arena." In response to the survey's findings, Terrapinn will host the "Investing in 130/30 Funds USA Conference" in Santa Monica, Calif., on March 17-19, 2008.