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Browse by CategoryHome » Category List » 130/30
Report: “Exposure yardsticks may provide little insight about a fund’s alpha potential”15 May 2008
A research paper by Morgan Stanley (available in the Morgan Stanley research dossier at AllAboutAlpha.com) reminds us that dollar-weighted exposure is not synonymous with beta-weighted net exposure. But the paper, another in a series by Marty Leibowitz and Anthony Bova, also argues that the beta-weighted net exposure doesn’t really tell us a lot about the potential information ratio (alpha/tracking error) of the fund. To gauge the potential IR of a fund, one should instead look at the ratio of “active” long positions to “active” short positions - or what Leibowitz and Bova call the “active ratio”. The active ratio, they argue, is more descriptive of the risk/return dynamics of a fund than the more recognized dollar-weighted or beta-weighted net exposure. They say the Active Ratio can reveal how long/short funds and 130/30 funds are really just first cousins:
“Active” long and short positions are defined as those that deviate from the benchmark (see posting covering a previous paper by the authors on this topic). So making a lot of active decisions when moving the long book from 100% to 130% would yield a far different active ratio depending on the activeness of the short book. The following chart from the paper illustrates how dollar-weighted exposure, beta-weighted exposure and active exposure can all differ for the same fund:
In this example, the dollar-weighted net exposure is 60%, the beta-weighted exposure is 50% (since the longs apparently have a lower average beta than the shorts), and the active ratio is 0.67 (60%/90%). Of course, the active ratio of a long/short fund only indicates the potential for alpha. A high active ratio means little unless you also know that the manager has a bunch of good investment ideas up his sleeve. Given the same set of alpha-producing investment ideas, two funds with very different amounts of active short and active long exposures can actually have the same information ratio - as long as the ratio of active short exposure to active long exposure is the same in both funds. In other words, given the same set of investment ideas, a fund with active long exposure of 90% and active short exposure of 60% will produce the same information ratio as a fund with an active long exposure of 120% and an active short exposure of 80%. As long as the ratio of the two numbers remains constant, the IR remains the same. So scaling up the active long and short exposures increases alpha and tracking error in the exact proportion required to keep IR stable (as in the table below). But while the same active ratio leads to the same IR (ceteris paribus), it doesn’t say anything about the absolute size of the alpha or the IR. That part, as usual, depends on the quality of the investment ideas. This particular paper arbitrarily assumes that the alpha of the best idea on the list is 5% and that the alphas of the remaining stocks decline linearly to 0.4% for the 50th best idea. According to the authors, the relationship between the active ratio and the IR is governed by other factors as well. A larger number of positions requires more scraping the bottom of the barrel for investment ideas and thus leads to a lower IR for any given active ratio. Still, the IR would be the same regardless of the activity ratio chosen by the manager. The paper dives a little deeper into the implications of this axiom, but Leibowitz and Bova tie it altogether in the following simple lesson:
Download full paper here (with free registration).
Comments »Alpha-centric investing described as a “seismic shift”9 May 2008
Now the landscape is changing. Or perhaps more accurately, investors are now expressing a desire to try their hand at portfolio construction using basic ingredients such as cash, beta, and alpha. This FT article (”Equity fund outflows bring need to adapt“) is a must read for anyone who thinks we’re nuts. The newspaper describes the changes facing the asset management industry as nothing less than a “seismic shift”. Kevin Parker, the head of Deutsche Bank’s $800 billion money management business tells the FT:
The FT also cites Jim McCaughan, CEO of Principal Financial Group as an advocate of alpha-centric thinking:
Continues the FT:
On its surface, the growth of 130/30 strategies seems to run counter to this trend. After all, the whole purpose of this strategy is to combine more alpha with beta - not to separate alpha from beta. But we suggest that the mere recognition of an alpha component and a beta component (often generalized as the “beta one” characteristic of these funds) makes 130/30 a step forward and worthy of the alpha-centric moniker. According to the FT, the seismic shift may change the landscape forever. Just in case you read the STA report released last week (see posting) and believed that hedge funds are the only asset class with the capacity to shake the entire financial system, note that this article ominously concludes:
The possibility that Q1 was only a tremor will surely keep Parker, McCaughan and other asset management CEOs up at night - and ready to stand in a secure doorway or take refuge in a bath tube when the “Big One” hits.
Comments »Report says hedge funds, portable alpha and 130/30 all leading to (financial) climate change5 May 2008
Although the 130/30 market has grown since then, it remains in the very low hundreds of billions globally. Yet in a report released a few days ago, the Security Traders Association (STA) blames recent market volatility, in part, on 130/30 funds. Says the report:
High velocity hedge funds seem to be primary focus of the STAs concern. But 130/30 isn’t the only institutional investment strategy at which the STA points a finger. The use of derivatives (for example, for portable alpha) is also identified as a growing source of market volatility by the report:
Comments »Survey of hedge fund professionals: 130/30 “minor discussion within larger context”4 May 2008Regular readers may remember our survey of attitudes toward 130/30 funds last August. Since that survey, several others (e.g. Merrill Lynch, Vodia Group) have come up with similar numbers - about 15-17% of institutions actively investing in 130/30 and another 25-30% considering investments in the next 12 months. Today, Kathryn Wilkens tells us of a recent survey of practitioners (members of the Chartered Alternative Investment Analyst Association) on this topic in our regular instalment of “Alternative Viewpoints”. A true advocate of alternative investments herself, Kathryn Wilkens received a Ph.D. in finance at the University of Massachusetts in 1998, and received a Center for International Securities and Derivatives Markets (CISDM) fellowship in 1997. She was on the CAIAA’s advisory board from the program’s inception in 2002 though 2005, and is now the CAIAA’s Director of Curriculum. Alternative Viewpoints - powered by CAIA
Last month, 440 CAIA members responded to a survey on 130/30 funds and I presented the results at Terrapinn’s 130/30 conference in Santa Monica. The survey questions were structured around two main themes frequently discussed here at AllAboutAlpha.com:
When I posed the first question to the attendees at the Terrapinn conference, all but one responded that a standard long-only equity index such as the S&P 500 index or the Russell 2000 is the appropriate benchmark for 130/30 funds. Yet Dow Jones, Credit Suisse, and S&P have all recently developed 130/30 indices (see related AAA postings Dow Jones joins the 130/30 Index Parade, S&P follows CS into 130/30 index business, 130/30 Indices: True indices or like playing chess against a computer?) Two of these indices are classified as a type of “Strategy Index” with another being a so-called fundamental index.
Comments »1X0/X0 and the hunt for African alpha1 May 2008
But is it really alpha? To address this question for us, we welcome the following guest contribution from Helena Conradie of major South African money manager Sanlam Investment Management. Helena is the Head of Sanlam Investment Management’s equity quant boutique that manages over R21 billion. She is a CFA charterholder and has an MSc in Applied Mathematics Cum Laude from Stellenbosch University.
In just more than 18 months people all over the world will flock to South Africa to attend the world cup soccer event, paying generously to see amazing flair and display of talent. But would they consider South Africa as the location for amazing alpha? At any given time there is a finite amount of alpha available for fund managers to hunt. And as we all know, it is “all about alpha!” The diversity of stock returns across all sectors (the cross-sectional volatility) is a good indication of the presence of alpha. So does the South African rainbow provide the alpha hunter with enough diversity?
Comments »After launching 130/30 index, S&P says best yardstick is actually a long-only index29 April 2008
We were skeptical - noting that 130/30 amounted to simply leveraging the alpha potential of a strategy and was not really a strategy on its own (see posting). But we didn’t confine our skepticism to S&P. We also raised questions about the approach taken by Credit Suisse (see posting). We reasoned that since both indices were based on proprietary models, their performance was entirely contingent on the performance of each company’s underlying investment decisions. While S&P stopped short of saying its index was “representative” of 130/30 funds, a published index like this is obviously meant to be used as some kind of benchmark for 130/30 managers. But now another S&P report says the best benchmark for 130/30 managers is actually an appropriate long-only index…
Comments »130/30 Manager: Don’t call us quants28 April 2008In a quick addendum to yesterday’s posting on the growth of fundamental 130/30 strategies, here is an example of one company that aims to distance itself from the pure 130/30 quants by adding an “intuitive” element to quantitative decision making. BNY Mellon Asset Management launched a 130/30 fund for European investors a couple of weeks ago that it says attempts to “harness alpha in a slightly different way than other quantitative managers by placing emphasis on fundamentals and economic intuition, rather than depending on more empirical methods.” While it’s not quite a slam against more quantitative fund, it does reflect the unease asset management marketing departments have with the association 130/30 has developed with one of last year’s sorriest alternative strategies.
Comments »The new face of 130/30?27 April 2008
While P&I describes this growth as “drastically slower” than last year, the numbers are still relatively small (53 managers), so it’s tough to draw any definite conclusions from these numbers. But we were were struck by what P&I said next: “…with most asset gains picked up by fundamental managers…” While fundamental strategies are gaining, quants still continue to dominate 130/30-land. As we’ve suggested before, it’s difficult to disentangle the poor performance of quant strategies in general from the performance of 130/30 as an investment approach. A rise or fall in 130/30 assets says more about managers’ view of the potential returns from beta, their own skill-level, their clients’ demands and their own particular business model than it does about the merits of short extensions per se. As a half-way point between long-only and market neutral funds, short extensions are simply an more aggresive form of active management, not an exotic new approach to investing.
Comments »Media turns hostile: 130/30 now “dubious” “overblown” “faddish” “hype”21 April 2008
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:
Comments »130/30 in the 1930s13 April 2008
The latest to conduct this analysis are Carl Armfelt and Daniel Somos, graduate students at the Stockholm School of Economics. Armfelt & Somos selected a set of basic Fama/French factors to create their alpha model and ran it all the way back to 1927. Here’s what they found:
Comments »Research says shorting ETFs in a 1X0/X0 portfolio holds unique benefits7 April 2008
This was a concern raised last June in this MarketWatch article (see related posting, “So Much for Double Alpha”):
While it may be true that hedge funds are in the business of creating alpha, 130/30 funds may be a little different. Institutional investors, the early adopters of these hybrid strategies, seek alpha too. But they do so with a watchful eye to volatility (known to them as “tracking error” vs. a benchmark index). The key ratio for them is the “information ratio” (alpha/tracking error).
Comments »In parliamentary-style debate 130/30 compared to “Cabbage Patch Kid”, “Roger Clemens”, and an “old pickup truck”27 March 2008
On Thursday, the Canadian chapter of AIMA, the Alternative Investment Management Association held its annual parliamentary-style debate in Toronto. This year’s resolution before the house: “1X0/X0 hybrid hedge fund strategies are simply a marketing fad.” With more than a passing interest in 1X0/X0 strategies, we were sure to show up for the fireworks. “Speaker of the House”, AIMA Canada Vice Chair Tris Lett was tasked with maintaining decorum in the oak-paneled main dining room of Toronto’s tony National Club (think, the club from the movie Trading Places). Clearly familiar with the mayhem of parliamentary debate, he warned debaters only against physical attacks and the use of foreign objects (a la the Taiwanese parliament).
Comments »Portable alpha demoted to “low opportunity” in new survey of consultants25 March 2008Regular readers will remember that in 2007, portable alpha and 130/30 were deemed to be “up and coming” by management consultancy Casey Quirk & Associates (see related posting). The firm surveyed 49 North American investment consulting firms and found that portable alpha, liability-driven investing and 130/30 “may not represent a search focus, but see rising interest in conducting search activity.” Casey Quirk just released the results of its 2008 survey. And this new edition concludes that 130/30 and LDI remain “up and coming”, but portable alpha has been told to clear out its desk and move to “low opportunity” with commodities and fixed income. (”Low opportunity” is defined by the report as any asset class “faced with declining interest and little focus from the consultants in 2008.”) Here is how Casey Quirk saw the world back in March 2007…
Comments »130/30: Nature or Nurture?24 March 2008To uncover underlying genetic predisposition for certain kinds of physical or mental health issues, scientists often study identical twins that have lived apart for some time. The assumption is that any similarities between the twins must therefore be a result of genetics, not environment - of “nature”, not “nurture”. Gordon Johnson of Lee Munder Capital in Boston has been performing a similar of experiment on 130/30 funds for some time now. He has been comparing the results from long-only and 130/30 funds managed by the same investment manager. By comparing funds with the same underlying genetic code (the managers’ unique investment views), he aims to determine whether the use of a ”short-extension” per se leads to a fundamentally different outcome. Johnson’s previous research indicated that 130/30 funds have indeed outperformed their long-only twins (see related posting). He has recently updated his findings to include the second half of 2007 - a volatile period for both the market and for 130/30 funds. We were curious to see these results because Johnson’s previous findings were based on years when the market appreciated. It turns out that the addition of the rest of 2007’s data reinforces his earlier finding that 130/30 funds have out- performed long-only funds managed by the same managers. As you can see from Johnson’s new chart above, over the past 42 months 130/30 funds have significantly outperformed their traditional siblings (note: he finds only 8 sets of twins in the eVestment Alliance database.) So it appears that when it comes to 130/30 funds, “nurture” continues to count for a lot.
Comments »Start your alpha engines, “the race is on”23 March 2008
Hedge Funds “outperformed by a very handy margin” Of course, this convergence presupposes that these alternative asset classes actually represent something of value. And after racking up volatile results over the past 6 months, hedge funds, for one, are raising some eyebrows. Still, Merrill argues that recent performance does little to diminish the value of hedge funds:
This last point bears some reinforcement, we believe, because “bubbles” occur when investors bid up prices in a relatively short amount of time. As this report points out, the percentage of assets managed by hedge funds has grown rather slowly, they continue to represent less than 1.5% of global “mainstream” assets and their net asset values are based on underlying securities, not a subjective premium like, for example, tech stocks (see related posting).
Comments »Dow Jones joins 130/30 index parade16 March 2008
Like CS (see related posting) and S&P (see related posting), Dow Jones simply executes a pre-existing security-selection methodology in a 130/30 format. The security-ranking methodology is called “RBPP” (”required business performance probability”) and it measures companies according to the likelihood that management will meet the business expectations implied by recent stock prices. In fact, the index is simply a combination of three existing indices. Says the index methodology overview:
Comments »Alpha-centric Newsreel14 March 2008
Morgan Stanley says Alpha/Beta Separation “the way of the future”. The AllAboutAlpha site partner lays out its alpha-centric philosophy telling IPE that the pension industry is about to experience a “second wave” of LDI strategies based on the separation of alpha and beta. Dutch Insurer Aegon splits portfolio into alpha and beta segments are farms each one out to a different manager. According to the firm’s press release, “By managing the parts separately from one another, better risk-return ratios are possible. This way, more sources of value added will be available and a greater focus can be created in the portfolio. Separating the US share portfolio has created an increase of a yearly average of the total return of 2.5% without any risk increase.”
Comments »Manager: “We would look at short extension funds for the next big mutual fund scandal”13 March 2008We admit to drinking a lot of our own Kool-Aid here at AllAboutAlpha.com. So we actively seek out dissention and differing opinions as much as possible. We had planned to bring you one such story about a manager who says investors “should be wary of [130/30] funds offered by large financial services institutions with affiliated brokerage and ending operations”. But our friends (and AllAboutAlpha media partners) at Lipper HedgeWorld published a great piece on Kirchner’s thoughts late last week. The article is for HedgeWorld’s premium subscribers only, but we have been given permission to bring it to you in its entirety below…
“L/S Manager Says 130/30 Funds Create Negative Alpha”
Implementing 130/30 strategies creates negative alpha from the start, said Thomas Kirchner, a portfolio manager at Pennsylvania Avenue Event-Driven Fund, a Washington, D.C.-based mutual fund that practices short selling. On his blog, The Deal Sleuth, Mr. Kirchner posted a paper he wrote that stands in stark contrast to the recent hype around 130/30 products in the asset management industry. In the post “Negative Alpha Is Built Into 130/30 Funds,” Mr. Kirchner wrote that the problem with 130/30 funds is that they invest all the money they have. So in order to short, they have to borrow. And that comes at a cost. In theory, the manager of a 130/30 fund goes long using 30% leverage and then shorts the same amount, which gives the portfolio a total long/net exposure of 100%. But in an interview, Mr. Kirchner said that most of the advocates of 130/30 funds—prime brokers, asset managers and sell-side analysts—fail to provide the whole picture. The investor, he said, is told that in addition to placing 100% of his principal in an index, 30% of the invested amount will be sold short, and that the proceeds of the short sales will be used to acquire a 130% long position. The net exposure is still only 100% and generates pure beta, while the long/short component of the portfolio is supposed to generate some alpha. That’s the concept.
Comments »CIO of the North Dakota State Investment Board on why he chose 130/3027 February 2008We talk a lot about the theory behind 1X0/X0 strategies. But given the nascence of this sub-sector, it has been difficult to come up with any real-life examples about which to write. Today, however, we welcome guest contributor and 130/30 investor, Steve Cochrane, the Chief Investment Officer of the North Dakota State Investment Board (NDSIB). With over 26 years of institutional investment experience Steve is responsible for the administration of the agency as well as overseeing a $5.4 billion diversified investment portfolio. The NDSIB was selected as a nominee for Money Management Letter’s 2007 Savviest Public Plan of the Year and is a speaker at Terrapinn’s upcoming 130/30 conference in Santa Monica. 130/30: How it works for North Dakota State Retirement Scheme
After twenty years in the institutional investment management business, I came to a monumental realization that what I had learned in business school is true: large cap securities that are actively traded in major financial markets are most likely efficiently priced. It has now been eight years since that awakening. The efficient markets hypothesis (EMH) was originally developed in the late 1960’s. It states that market prices should reflect all information known about a security. After forty-five years of research and testing, most agree that this hypothesis is increasingly correct as capitalization and liquidity increase. When it comes to the Large Cap Domestic Equity asset class in the United States, theory converges with reality. I arrived in North Dakota to assume the CIO role in January of 1997. Awaiting me was a US$2 billion pension fund with an array of active managers who were benchmarked against the S&P500 index of large cap stocks, as well as S&P500 style benchmarks. While some were growth oriented and others pursued value and yield investing, they all had one thing in common: underperformance relative to benchmark.
Comments »130/30 has “opened up serious questions” for brokers and custodians: report13 February 2008A survey from consultancy Vodia Group backs up previous surveys from Merrill Lynch and AllAboutAlpha.com by finding that roughly 15% of institutional investors currently invest in 130/30 funds. As a result of expected growth, Vodia anticipates major changes in the prime brokerage and custodian businesses. According to the firm’s press release:
Apparently life won’t be all that bad for prime brokers though. According to a chart released by the firm, prime brokerage financing revenues will increase dramatically over the next 4 years - even as financing spreads come under pressure…
Comments »2007 data suggests 130/30 outperforms29 January 2008Our friends over at eVestment Alliance, a major database of institutional money managers, recently provided us with some interesting 130/30 data hot off the presses for a presentation Alpha Male delivered in Europe. Firstly, check this out. Back-testing has shown that 130/30 funds would have performed better than their long-only analogs over the past several years (see related posting). But does this match reality? Unfortunately, there simply haven’t been enough funds around long enough to paint a complete picture. However, eVestment Alliance has been collecting data from managers of institutional funds for some time now. While the pre-2006 numbers are a little thin, annual return data shows that 130/30 funds have indeed outperformed the S&P 500 every year since they started tracking such funds (the white number shows the number of 130/30 funds tracked by eVestment Alliance).
Comments »The difference between retail and institutional investors24 January 2008
This article at Kiplinger.com is the latest to poke holes in 130/30 for the wrong reasons. The magazine that bills itself as “Timely, Trusted Personal Finance Advice…” dispenses some remarkable simplistic advice about 130/30 mutual funds. It starts like this:
You can guess how the piece goes on. But it’s how the story ends that says a lot about the kind of “trusted personal finance advice” being provided to people like you and me:
Comments »Reality Check: “130/30″ and “quant” not synonymous23 January 2008
130/30 funds had a tough August to be sure, suggesting Watson Wyatt’s nervousness is not unfounded. But a closer examination of the story suggests that this case of nerves isn’t particularly significant. First of all, a large minority of 130/30 funds are fundamental, not quantitative. In addition, quant 130/30 funds don’t use much leverage (1.6x). So a “deleveraging event” would have a minimal direct effect (although de-levering by highly-levered funds using similar quant models could still hurt the 130/30 managers). The point is that the story is about quant funds, not 130/30 funds per se. So we thought it was kind of funny that a passing reference to 130/30 made it all the way into the story’s headline (”Watson Wyatt ‘nervous’ over 130/30 funds”). Naturally, this prompted some other outlets to morph this from a quant story into a 130/30 story.
Comments »130/30 Experts: pick your compensation… “attractive”, “competitive”, or “outstanding”22 January 2008
According to a survey released on Monday, asset management staff turnover in the UK has reached new heights. Thomson Investment News comments:
On the other side of the Atlantic, this seems to translate into an apparent need for 130/30 experts. Do you pay “extreme attention to detail” and looking for “attractive” compensation? Then a leading NY-based quant manager wants you. The firm is one of three that has recently posted 130/30 jobs at a popular financial career site. According the posting:
Comments »130/30 Primary: Merrill 130/30 poll corroborates earlier polling, but also finds some new surprises14 January 2008
The survey also finds that investors are biased toward long-only managers when it comes to 130/30. This will surely add fuel to the already rancorous debate over who is better equipped to provide these funds.
Comments »130/30 Indices: True indices or like playing chess against a computer?7 January 2008
Clearly anticipating such a line of questions, the developer of the Credit Suisse index, AllAboutAlpha Hall-of-Famer Andrew Lo of MIT, addressed this question head-on in his December 11 paper on 130/30 indexation (”130/30: The New Long-Only”). The paper has generated quite a bit of chatter recently (the subject of this Pensions & Investments story today and a column in the Economist this week.) Say Lo and co-author Pankaj Patel:
Comments »What’s behind Trusco’s partial acquisition of 130/30 manager Alpha Equity?6 January 2008
That is, assuming they have the luxury of time. Some markets evolve so quickly and are so scalable, that there is simply no time to build a new business from scratch. So larger players begin falling over themselves to buy their way to a first mover advantage. Witness many of Google’s acquisitions. Sure, the Googleheads could have built any business they wanted by just going out and hiring the right people and throwing money at them. But they obviously felt that establishing a beach head in, say, video sharing, couldn’t wait. Ergo, the YouTube deal. It’s in times like these when the small fry can hold a major trump card - they’re already established and they have proven experience with these new technologies. And that’s pure gold for the established players. Sun Trust, the $175 billion US bank, may not be a Google. But like Google, it knows when to pounce quickly on a new idea. Via its asset management subsidiary, Trusco Capital Management, the firm wasted little time last week as it bought a minority stake in Hartford-based Alpha Equity Management, a relatively small firm that had one thing SunTrust couldn’t possibly build in the next year or two: six years of experience running 130/30 funds.
Comments »Morningstar’s Deutsch: 130/30 “not monolithic” but does represent a “convergence” in money management1 January 2008Welcome back. Today, we bring you another in our ongoing series featuring the thoughts and perspectives of members of the CAIA (Chartered Alternative Investment Analyst) Association. You may recognize the name Steve Deutsch from recent media articles on 130/30 investment vehicles. Deutsch is Morningstar’s resident expert on these vehicles and therefore has a bird’s-eye view of the sector and its recent performance. Below, Deutsch draws on his company’s extensive database to take a closer look at the 1X0/X0 phenomenon. ALTERNATIVE VIEWPOINTS (powered by CAIA):
Special to AllAboutAlpha.com by Steve Deutsch, CFA, CAIA, Director of Collective Investment Trusts/Separate Accounts, Morningstar, Inc. Despite all the excitement about short-extension strategies, 130/30, 120/20 and other constrained ratio investment products are not that monolithic or revolutionary (Morningstar refers to them simply as “leveraged net long”). Contrary to popular assumption, most are not purely quantitative. Nor are they the sole domain of mutual fund companies and retail investors. And given their short histories, many remain unproven. As a result, it is far too early to determine if these vehicles will reach $2 trillion (or even $1 trillion, for that matter) in the next five years. Not Monolithic 130/30 is a shared investment strategy, but that’s not a basis for large categorical conclusions. It’s misleading when money managers or the media make broad general conclusions such as “130/30 strategies did well (or poorly) in the early days of the credit crunch market downturn.” Sharpe’s law of performance attribution has been cast aside in this discussion. As always, performance is driven by an investment vehicle’s underlying assets. In the Morningstar databases we have seen these strategies predominantly invest in ”large blend” assets. But we also see mid- and small-cap, corporate and government fixed income, and international varieties of these products. Below are some randomly selected strategies, for both institutional and retail investors, with recent net portfolios presented in a Morningstar ownership zone analysis. The “centroid” indicates where investments are concentrated, while the ellipse shows the range of holdings in each 130/30 net portfolio. (Note that the selected money managers actually have very diversified leveraged net long holdings.) | ||||||||||||||||||||||||||||||||||||||||
Whether one is referring to a 1X0/X0 fund or to some other long/short variant like a market neutral fund, there is often an implicit assumption that the “net exposure” provides all the insight required into the return potential of the fund. For example, many commonly assume that 130/30 funds are “beta neutral” and therefore that the “30/30″ portion will generate pure alpha. But what if that short-extension was just offsetting? To use an extreme example, if it was 30% long the S&P and 30% short the S&P, then there would be no alpha.
We have always argued that actively-managed mutual funds are essentially a marketing package for two fundamentally different formations: a large deposit of beta and a vein of pure alpha. Unable to travel either the peaks and valleys of beta or the undulating topography of pure alpha, mutual fund companies long ago found a neutral territory that seems to have satisfied investors worldwide for over 50 years.
Last year, we published a couple of articles on the somewhat Malthusian possibility of a global shortage of stocks available for borrowing. (”
Special to AllAboutAlpha.com by: Kathryn Wilkens, Ph.D., CAIA, Director of Curriculum, the 
Last September, 
Special to AllAboutAlpha.com by: Helena Conradie, SIM Equity Quants
Back in November S&P launched its 
Pensions & Investments 
As the footnote to Chuck Jaffe’s recent 
Faced with a lack of track record for active extension funds, researchers are forced to re-create how these funds would have performed if they had existed for some time. The idea is to select an “alpha model” (an unfortunate term since alpha cannot technically be “modeled”) and run it back in time using real market data to see how it would have performed. The model is run once as a long-only portfolio and then again using any number of 1X0/X0 strategies. Comparing the performance of the models can yield some insight into whether the short extension itself adds value to a given alpha model.
Hedge fund managers often contend that long-only managers lack the skills required to short-sell. They will point to things like the fact that short positions will actually grow as they move against you (unlike long positions which shrink as they move against you). They will also point to the fact that shorts tend to be driven more by catalysts than longs. But one of the most legitimate concerns raised by hedge fund managers is the simple fact that good short ideas are often in short supply. 
Those unfamiliar with the inner workings of a parliamentary democracy always find the hoots and hollers accompanying parliamentary debate to be a source of great entertainment. Every week in countries around the world various prime ministers subject themselves to intense, direct and sometimes vicious attack. Some countries (such as Canada) have laws actually protecting legislators from libel suits for whatever barb they throw at their fellow parliamentarians while inside the house.
In a 
Dow Jones 
Here is a sample of the news stories we didn’t get a chance to explore in detail this week. As usual, all of them can be found on the Alpha-ticker above or in the news items section of AllAboutAlpha.com (free registration may be required for a few of these).
WASHINGTON (HedgeWorld.com)—Investors may get alpha with a 130/30 fund, but it won’t be free. In fact, the cost may end up being prohibitive, according to one long/short equity fund manager.
Special to AllAboutAlpha.com by: Steve Cochrane, Chief Investment Officer, North Dakota State Investment Board
They sure aren’t a silver bullet, but short-selling and using a bit of leverage is a proven way to give a manager more latitude to express her investment opinions. So it’s always interesting when the concept of 1X0/X0 is summarily dismissed because it’s “unproven” - like some screwy new market, or a derivative that most mortals can’t understand. The bottom line is that if investors in active funds believe in their managers’ ability to produce alpha - and supposedly they do or they wouldn’t invest with them - then why not give them more latitude (especially when that latitude has a hard cap)?
Yesterday, Watson Wyatt told its clients that it was getting a funny feeling about quant funds. According to 
Merrill Lynch releases it’s latest 130/30 survey results this week and reiterates that $1 trillion will be invested in 1X0/X0 strategies by 2011. While this estimate is in line with earlier prognostications from Merrill, the report’s author says a few of the findings surprised even him. Number one among those findings is the fact that public pensions seem more enamored with the idea of short-extension strategies than private pension plans. According to 
During the final months of 2007, Credit Suisse and S&P both launched what they called “130/30 indexes”. CS didn’t say much about their methodology at the time, but S&P published the entire index construction approach online. After reading that approach 
It can be notoriously difficult to maintain a competitive advantage in industries requiring a high degree of intellectual and human capital. After all, ideas (and people) are free to seek the highest possible return - where ever that may be. This usually means that the behemoths with the deepest pockets and greatest career opportunities can, given enough time, build their own businesses to compete in new and burgeoning markets.