Barclays PhD’s Build Hedge Fund Giant Inside No. 3 U.K. Bank
Jan 5th, 2007 | Filed under: Institutional InvestingBy: Edward Robinson, Bloomberg News
Published: January 5, 2007
This article provides an interesting follow-up to a Barron’s piece in October on BGI’s “Triumph of the Nerds” that also discussed the Genesis of BGI – a team that included William Sharpe, Eugene Fama, Fischer Black, Myron Scholes, & Barr Rosenberg. Not since the movie “The Breakfast Club” have so many cast members gone on to achieve such celebrity.
Not surprisingly, BGI agrees the line between hedge funds and long-only investing is an artificial one.
“Institutional investing is undergoing radical change, according to (Blake) Grossman (BGI CEO)…’We think this artificial divide between long-only and long/short is one that’s destined to become extinct over the next several years,’ Grossman says.”
BGI’s bifurcated alpha/beta approach (i.e. hedge funds/ETFs) has sent its stock skyward, prompting some analysts to speculate about where the firm will be an acquisition target.
“BGI and Barclays Capital have helped make its British parent a potential hot property. On Dec. 11, Barclays rose to a then- record of 746.50 pence a share after Merrill Lynch & Co. analysts Brian Bedell, John-Paul Crutchley and Edward Najarian wrote to investors that Bank of America Corp. might be interested in buying the bank.”
With one foot firmly planted in the world of Beta and one in the world of Alpha, it’s no wonder BGI is emphasizing 1X0/X0 strategies:
“Lately, BGI, originator of the index fund, has been pushing a new type of long/short strategy designed to mimic hedge fund investing at a fraction of the cost. These funds short the equivalent of 20-30 percent of their assets and employ a tool common to hedge funds: leverage. Money managers call these investments 120/20s or 130/30s, because they borrow the equivalent of 20-30 percent of the value of their assets to finance the short sales.
“The funds aren’t bona fide hedge funds, because they short on a limited basis and otherwise track an index such as the S&P 500.”
Not bona fide hedge fund strategies, but pretty close! A hundred dollars invested in a 130/30 fund is not that different than $100 invested in an index fund along with a notional amount of $30 invested in a market neutral long/short overlay (with fixed exposure guidelines)? Likewise, it’s not that different than $70 invested in a (43%) levered ETF and $30 invested in a hedge fund (with similar risk guidelines)?
With a surfeit of alpha and beta at its disposal, BGI is able to mix them together, add a constraint or two and presto: a new animal that looks like it’s neither long-only nor a “bona fide” hedge fund – while it is actually both.
To add to the nomenclature confusion, 1X0/X0 investor Calpers sees the strategy as essentially long-only and has tapped Analytic Investors to manage what it calls simply “reducing constraints around managers that are highly skilled”. (Sounds like they’ve been talking to Ingrid Tierens of Goldman – Analytic Investors’ co-manager on the account.)
Email This Post
Print This Post
