Media turns hostile: 130/30 now “dubious” “overblown” “faddish” “hype”

Apr 21st, 2008 | Filed under: 130/30, Media Coverage of Hedge Funds | By:
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As the footnote to Chuck Jaffe’s recent MarketWatch piece on 130/30 suggests, his opinion carries a lot of weight (“His work appears in dozens of US newspapers”).  So when he presented such a negative view of short-extension strategies, we felt compelled to explore his arguments further.  Unfortunately, while he presents an adequate understanding of the strategy, he is too quick to write off the approach.

His April 20th commentary is entitled “Long on shortcomings: Numbers don’t add up for faddish 130/30 funds” and his main argument is that “early returns don’t seem to justify the hype”. While that may indeed be the case, extrapolating from these early returns is premature at best and totally inappropriate at worst.

Headline-writers as “dozens of US newspapers” are getting creative with Jaffe’s piece:

Stretching the data

Unfortunately, readers in dozens of US cities are now getting the wrong idea about 130/30 funds.

For example, Jaffe references research conducted by the UK-based Investment Week magazine:

More…

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  1. [...] 130/30 managers do not face unique challenges, that long-only investors somehow avoid. (All About Alpha) [...]

  2. By design, 1X0/X0 funds are meant to give investors more of a portfolio’s active strategy for every dollar invested, without changing the level of market exposure. Period. A manager who is successful with a long-only strategy should be maybe half again more successful with 1X0/X0, versus a correct benchmark.

    Since there’s so much debate as to whether active managers can add any value over fees, it’s unsurprising that more of those strategies, with no letup of fees, will generate similar debate as to whether the approach adds value.

    It’s reasonable to hope that more savvy managers will be in the avant garde for 1X0/X0, but why wouldn’t the best clue be how well these managers do with long only?

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