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Extending the Alpha Universe: 130/30 Short Extension Versus Portable Alpha

Oct 18th, 2006 | Filed under: 130/30

By: Ric Thomas, State Street Global Advisors
Published: April 13, 2006

State Street provides us with a public service here by helping us figure out if 1X0/X0 strategies are really just hedge funds in drag. They set out to compare 130/30 “short-extension” strategies with “equitized long/short funds” (i.e. dollar-neutral long/short portfolios sitting on top of a whack of beta):

“…one could argue that short extension strategies are no different than equitized long-short strategies in terms of effective active exposures. A manager could easily replicate a short extension portfolio by shorting the underweighted stocks, purchasing the overweighted stocks, and equitizing the final portfolio with index futures or swaps. The equitized method is simply one variation of portable alpha, which many investment managers already practice.”

While they acknowledge the striking similarities between these two strategies, they also argue that “subtle differences” do exist:

“…portable alpha structures give managers greater flexibility in taking bets and are ideal for managers with insights that extend beyond pure stock selection. In contrast, short extension strategies retain much of the discipline and risk control associated with successful long-only equity investing.”

Fair enough. But we’re still not convinced there is a real difference beyond the way each strategy has been “branded” by the industry. State Street, which sells both types of products, says both can co-exist and that the difference in their lineage (above) will:

“…likely cause plan sponsors to carve out 130/30 strategies from their long-only equity allocation, while portable alpha will continue to reside in the alternatives space.”

Many of the arguments made in this article rely on a very specific definition of portable alpha that necessarily results in a difference between it and a 130/30 strategy (e.g. that portable alpha strategies have more flexible mandates). The author says that 130/30 strategies’, “major risk characteristics such as size, style, beta, and sector risk remain the same [as long-only mandates].”

We’re still not sold on the difference (beyond the obvious mathematical constraints inherent in “130/30″). It seems the more our industry evolves, the more it stays the same. First we called ourselves ”hedge funds”, then it was “alternative investments”, then “portable alpha” and now we’re “130/30″ managers. We at AllAboutAlpha.com still think this is more about branding – putting alpha in more understandable and “digestible” form for investors. And that’s really not such a bad thing after all.

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