130/30 A New Paradigm or A Fad? Exclusive results from new survey.

130/30 05 Sep 2007

How would you complete the following statement: I consider 130/30 strategies to be:

a) A marketing fad
b) A new investment paradigm with long-term potential

In a recent survey of 135 institutional investors, asset managers, consultants, and service providers, 62% chose b) a new investment paradigm with long-term potential.

The survey was conducted jointly by Terrapinn, a producer of conferences on this sort of topic and AllAboutAlpha.com, which as you know, has more than a passing interest in emerging asset management ideas like this.

As regular readers of this website are aware, 130/30 (120/20, 140/40, or more generically 1X0/X0) is a hybrid strategy involving some elements of hedge funds and some elements of traditional long-only asset management.  As such, it offers what some might say is a bridge between these two, often diametrically opposed, worlds.

Click here to read a press release containing the survey highlights.  And for much more information on this topic, click here for links to over 20 postings we have written on 130/30 or click here to access our library of academic papers and PDF articles on 1X0/X0 (registration is on the house).

What follows below is a more detailed look at the survey results.  Since much of this data is presented in chart form, we have truncated this posting here to save ink.  Just click read the rest of this entry to continue.

Respondents to the poll included mainly asset managers and institutional investors.

And most were based in the US and Asia.

The poll was not meant to be a scientific study.  Naturally, many respondents to such a survey have a pre-existing interest in the topic being researched.  In addition, the method used to gather responses will influence the type and geographic location of respondents.  In other words, this poll perfectly describes the opinions of 135 respondents with the characteristics above.  Extrapolating it to the entire population of investors and asset managers should be undertaken with caution.

With that caveat in mind, familiarity with 130/30 strategies seems to be relatively high in our sample.  Nearly half of all respondents were either implementing 130/30 currently or were considering doing so in the next year.

Among investors in the sample, 130/30 is quickly becoming mainstream – matching single-strategy hedge funds as a significant element of institutional portfolios.

Asset managers are not oblivious to this trend.  Nearly 20% currently offer such funds.

Consultants have also been quick to respond to this burgeoning interest in 130/30.

So why all the interest?  Reasons differ slightly depending on perspective.  Asset managers say that 130/30 allows investors to tap into more alpha sources without the baggage that some say comes with hedge funds.  Apparently students of the research on this topic, investors rank higher information ratio as the key source of interest.

However, those investors who do use 130/30 strategies note several new challenges.  In particular, investors seem concerned about how to select a 130/30 manager.  Naturally, managers themselves don’t see this as being as much of a problem.  Instead, they rank board approval to short-sell as the biggest challenge in implementing 130/30.

Roughly half of investor respondents did not have imminent plans to adopt 130/30 strategies.  Most of them said they were not convinced of its merits.  Interestingly, many of them seemed content to get short exposure from direct investments in hedge funds, rather than as part of a 130/30 strategy.

Asset managers had their own ideas about why many investors are hesitant to adopt 130/30 strategies.  In their opinion, investors are concerned about the short-selling abilities of prospective 130/30 managers.  They also felt that push-back on fees and a lack of a lengthy track record led to some hesitation among prospective investors.

Finally, the survey asked asset managers to comment on why they had developed a 130/30 offering.  It’s immediately apparent that this group sees 130/30 as a source of competitive advantage.  In fact, it appears that long-only providers see 130/30 as a chance to gain an advantage over hedge fund companies, while hedge funds see it as a chance to compete against traditional managers.  Nearly a third of asset managers have entered the market in response to client requests.

Although it is an unscientific poll of the industry, this survey suggests that 1X0/X0 strategies are quickly becoming mainstream.  In our opinion, 130/30 represents a quintessentially alpha-centric approach to traditional investing on the one hand, and a pragmatic strategy for hedge funds to gain a foothold in the much larger long-only arena on the other.

So it seems that whether or not you believe 130/30 is a fad or a new paradigm of investing, there will be no avoiding it in the foreseeable future.

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