Wait a Second. Didn’t we fish there already?

130/30 14 May 2007

The wildly popular 130/30 strategy can best be described as a long-only fund with a hedge fund component.  So why didn’t it sell that well in its earlier incarnation as a hedge fund with a long-only component?

As we have discussed a few times on these pages, the “dramatic growth” of the hedge fund industry is actually highly concentrated in the top few hundred hedge fund companies.  In fact, by some measures the sub-billion dollar hedge fund industry has been stagnant in recent years (in aggregate).  Why?  Unless you enter the industry with an existing reputation garnered from a prop desk, asset management firm other hedge fund, raising money isn’t as easy as the media makes it out to be.

And it’s not getting any easier as institutional capital seeks out larger hedge fund companies with recognized names.  But ask a marketer at a smaller hedge fund firm (few actually have them in-house), and you’ll probably hear a note of resentment over the feeling that institutions favour firms they already know like, say, their existing long-only manager.

“No one ever gets fired for hiring IBM”, they used to say.  And similarly, no one is likely to get fired for simply continuing to use existing suppliers for new product offerings.

Enter 130/30.  This article in P&I makes it abundantly clear that institutional investors are more willing to role the dice with their existing managers than they are with dedicated hedge fund players when it comes to new investing strategies.  The article quotes Casey Quirk’s Jeb Doggett as saying:

“The 130/30 managers mostly don’t have long track records, so there’s a lot of ‘Gee, will you seed us?’ requests going out. There never really was a search, but money is being moved from existing accounts to these approaches.”

Now I’m just one data point, but my experience approaching institutional investors with the line “Gee, will you seed us?” didn’t end so well (and believe me, we tried).  Maybe I was just an idiot.  Or maybe…just maybe, brand meant more than strategy at the end of the day.

Before the term “130/30” was even coined, I recall hedge fund managers offering long/short (dollar-neutral) funds pre-packaged with market beta.  They called it “beta-plus” and thought it would finally break the mental log-jam that seemed to be holding many institutions back from investing in hedge funds.  But they didn’t bite.

Today, however, they’re biting like crazy.  In fact, they seem to be jumping out of the ocean and into the boat, laying down in a frying pan and whacking themselves over the head.  Why?  Apparently 130/30 managers seem to be using different bait.

Blogger Roger Ehrenberg also recently addressed this odd state of affairs by asking some pointed questions:

“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? Basically, it is the worst of all worlds…”

While I don’t necessarily see 130/30 as the “worst of all worlds”, I do agree with Roger that 130/30 bears a remarkable similarity to the failed beta-plus strategies of old.  (see related posting: Fahrenheit 130/30).

Given equally likely outcomes, it seems that many institutional investors would prefer to lose money following some else’s lead than they would lose money as a result of their own decisions.  Fair enough.  This isn’t that different from benchmark-hugging in the mutual fund industry.

Setting aside the frustration of having already fished in the 130/30 waters and having come up empty-handed, I now view 130/30 as simply another example of alpha-centric convergence in the asset management industry.  And in that sense, the universe is unfolding as it should.

– AM

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