UBS to manage 130/30 fund aimed at retail investors

8 August 2007

Despite all the hype around 1X0/X0 strategies, most suppliers have been able to hold their cards relatively close to their chests.  That’s because most of the buyers of these funds are institutional.  In other words, the funds are prospectus-exempt in many countries.  In fact, depending on the size of the investment, 130/30 strategies are often sold in the form of separately managed accounts (similar to many other institutional mandates).

It’s often not until a retail version of a strategy hits the market that we get a more detailed, or at least more readable, picture of the investment approach and value proposition of these funds.  This is exactly what happened in Canada last week when mutual fund manager Brompton Group filed a preliminary prospectus for a new closed-end 130/30 mutual fund.  The fund is sub-advised by UBS and is apparently a knock-off of an institutional fund offered by UBS in the US (”The Equity Alpha Relationship Fund“).

The impending launch was initially hinted by the Canadian media earlier in July (”130/30 fund poised to hit retail market“).  But what’s probably most interesting is the fund’s July 27th prospectus (publicly available here via Canada’s answer to the SEC’s Edgar Online).

It’s immediately apparent from the prospectus that the fund is being pitched as an answer to “overvalued” Canadian markets and “undervalued” US markets. (see chart from prospectus below) 

But curiously, the fund plans to invest “predominantly in large capitalization US equity securities” - even though they seem to suggest there are some great shorting opportunities in Canada.

According to the fund’s prospectus, long positions will range from 120% to 140% and shorts will range from 20% to 40% (max: 50%).  It seems that long positions will be about twice as large as short positions since there are twice as many long positions comprising about 4 times the gross exposure of shorts (130/160 vs. 30/160).  Individual long positions will be capped at 7-9% of NAV and shorts at 3% of NAV.

Although Brompton and UBS are clearly bullish on the US, readers of last week’s postings by Citigroup’s Manolis Liodakis will recognize the more market-agnostic argument in favour of 130/30 contained deep within in the prospectus:

“The Russell 1000 Index is the benchmark of the U.S. Equity 130/30 strategy. Approximately 84% of the securities in the Russell 1000 Index represent weights of 0.13% or less. In a long-only portfolio, where a portfolio manager decides to take only an underweight position in an overpriced security, the impact this position can have on performance is minimal. However, in a long/short portfolio, a portfolio manager has the ability to more fully utilize its investment insight by shorting the overpriced security to 0.25-1.25%, on average thereby creating an active position with the potential to add incremental returns to the portfolio.”

Aside form the usual fees involved with closed-end funds like this, there is a management fee of 1% and a performance fee (called a “market outperfomance fee”) of 20% over a Russell 1000 hurdle.  This differs from some of the flat-fee pricing we have seen and is analogous to treating the “30/30″ overlay portion as a de facto market neutral (or at least dollar neutral) hedge fund with a performance fee of 20%.  We submit that it’s this upside potential, not a grossed-up management fee, that will attract many traditional long-only managers to the 1X0/X0 space.

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One Response to “UBS to manage 130/30 fund aimed at retail investors”

1. Matt Says:
   August 13th, 2007 at 11:09 pm

   130/30 funds seem to offer the bonus of leverage and the ability of investors to benefit from managers ability to go both long and short. However, I think the funds are limited by high expenses and also can be negatively effected by poor manager performance.