Is there a capacity constraint facing 130/30 strategies?
Mar 29th, 2007 | Filed under: 130/30A few years ago, the hedge fund industry was all abuzz about the “capacity constraint” facing many hedge fund strategies. However, while certain strategies (e.g. merger arbitrage) exploited a limited set of opportunities, most funds (particularly those of the ubiquitous long/short persuasion) seemed to keep on trucking. Due to continued industry growth and some academic studies suggesting these concerns were overstated, “capacity constraint” hasn’t been rolling off the tongues of those on the hedge fund conference circuit and in the hedge fund media as easily recently.
So it’s curious to see a resurgence of this concern coming not from the usual suspects (hedge fund managers threatening to close to new investors), but from outside the industry: in the 130/30 arena. As early as last fall, Goldman Sachs was getting the alarm bells out of the attic and warmed them up. In a report on 130/30, The Firm said:
“In many ways, wondering about the capacity of 130/30 strategies might seem unnecessary, or at least premature. These strategies are still too new to have gathered significant assets: several firms only recently launched their versions of 130/30, and many others are still in the process of doing so. And yet, given the tremendous potential benefits of relaxing the noshorting constraint, 130/30 strategies are sure to attract substantial amounts of capital, and when they do, capacity could become an issue for many managers.”
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[…] Some have wondered if there would be enough stock to short and that the end was nigh. Last fall Goldman Sachs hypothesized that the end wasn’t imminently nigh, but might not be far off (we were less sold on their concerns - see posting).  Goldman’s numbers and those cited in the Hedgworld story are quite similar. Both say there is about $4.5 to 5 trillion of stock available to short in the world (about 10% of the world’s lendable stock and 3% of the world’s total equity supply). […]