New hedge-lite quant funds held up in Aug-study

Date: Friday, September 21, 2007
Author: Reuters.co.uk

NEW YORK, Sept 21 (Reuters) - New quantitative "hedge-lite" investment funds often called 130/30s didn't sustain the kind of underperformance last month that afflicted other kinds of quant hedge funds, a new study released on Thursday showed.

The study, conducted by funds tracker Morningstar Inc (MORN.O: Quote, Profile , Research) evaluated performance of 38 of the estimated 120 hedge-lite funds. It found the average performance was roughly flat for August, compared to a 1.5 percent gain for the Standard & Poor's 500 index.

The performance data is significant because most 130/30 funds haven't been tested during periods of high market volatility, such as last month when many previously top-performing hedge funds slumped, while others posted out-sized returns.

"Turmoil in the credit markets dragged down 130/30 funds in August, but generally not as much as hedge funds," said Morningstar.

Institutional investors have been flocking to new 130/30 and 120/20 strategies in recent years, pumping in an estimated $55 billion to $70 billion into these funds in the last several years, according to Steve Deutsche, Morningstar director of separate accounts.

Institutional demand for such strategies has swelled assets under management for large institutional money managers like Barclays Global Investors (BARC.L: Quote, Profile , Research), State Street Corp (STT.N: Quote, Profile , Research), hedge funds like AQR Capital Management, Renaissance Technologies Corp and other asset managers.

Such funds aim to give investors some of the upside of hedge fund investing through the use of selective short-selling, unlike traditional money managers, which typically don't short stock, use leverage or employ other hedge fund techniques. And the new funds charge lower fees than what hedge funds ordinarily charge.

Most 130/30s employ quantitative -- or computer model-driven -- investment strategies, not fundamental research. Hence, some industry watchers assumed that 130/30 funds got hammered in August like other quant funds, but that apparently wasn't the case, at least for the Morningstar database sampling.

"People were painting with a very broad brush and saying all of these quant strategies undoubtedly in serious trouble," said Deutsche. "But they do seem to have at least done reasonably well in August and year-to-date.

Adam Sussman, senior hedge fund analyst for research firm Tabb Group, said the findings show that 130/30 funds are performing to expectations, which is to give some alpha, or market outperformance, while giving some protection against market downturns that may afflict riskier hedge fund strategies.

"In order to protect against the downside, you have to give up a little on the upside," said Sussman. "In a given up month, you might expect 130/30s to underperform. But in a down month, you might expect them to outperform."