130/30 has apparently gone from the cat’s meow to doggone unpopular.

P&I reports this week that investors are “abandoning” 130/30 strategies.  However, the reality, as the article goes on point out, isn’t quite as dramatic.  According to the magazine’s widely followed semi-annual survey of short-extension managers, 130/30 AUM is down a little over 30% over the past 6 months.  With year over year AUM down 20%+ for the asset management sector overall, this may not actually qualify as “abandoning” - but “shying away” to be sure.  Reports the newspaper:

“In a risk-averse environment, 130/30 has lost its cool factor, with investors shying away from the strategy after getting clobbered in the market downturn.”

At an estimates US$50b managed by a handful of money managers (see P&I league table here), short extension funds were never more than a nascent sector.  Like all new industries, percentage increases and decreases can look pretty dramatic.

This point is apparently not lost on several 130/30 managers interviewed by P&I.  The head of UBS’s long/short business told the newspaper: More…

Since 130/30 or “short-extension” funds entered the investment lexicon over 3 years ago, it has generated considerable debate.  While industry commentators derided the strategy in the media, academics remained steadfast in their belief that short extension strategies have merit.

So what gives?  What is it in the academic literature that could support the existence of value in a strategy whose brief history seems to provide empirical evidence to the contrary?  Critics say that short extension strategies face some operational headwinds that long-only funds do not - that shorting is not simply the “reverse of long investing”.

The truth is that 130/30 funds are both academically sound and operationally-challenged.  An article by Morningstar published today provides a relatively dispassionate overview of these factors that stand in stark contrast to the typical critique of the 130/30 concept based solely on performance.  In it, Morningstar’s Nadia Papagiannis highlights several unique challenges faced by 130/30 managers: More…

Looks who’s making a return trip to the news after being largely tossed away by the media last year.  It’s alternative beta and 130/30.  As regular readers will recall, these hedge fund relatives seems to have died off last fall.  But this week, several firms announced new funds aimed at resurrecting interest in “hedge fund replication” and “short-extension” strategies.  And who knows, the time may now be right for these quasi-hedge fund instruments.

Clones or Zombies Back from the Dead

Hedge Funds Review reported today that Invesco, the mutual fund giant, launched an alternative beta strategy called “Premia Plus” (not to be confused with Premium Plus, the perfectly flaky cracker from Kraft).  Without calling itself a “hedge fund” (now a four letter word in the post-12/11 environment), the company borrows heavily from the hedge fund lexicon.  According to Hedge Funds Review, Invesco says it has developed a proprietary risk management strategy that “could generate equity-like returns with bond-like risk.”

The magazine also reports that Invesco is emphasizing many of the now de rigueur qualities of liquidity, low price and “transparency”.  (Although we wonder how useful “transparency” really is when the product still uses a “proprietary risk management and rebalancing technique”).

Not content to let Premia Plus steal the headlines, Barclays Capital just launched the “Barclays Alternatives Replication” Index last week.  The index comes in long and short versions called LBAR and SBAR (much like Innocap’s products and T-Rex offered by Socgen).  Barclays says that LBAR tracked the HFRI better than “four main competing hedge fund indexes” last year.  This statement is a refreshing change in a field where companies often seem to compete on the basis of performance, not tracking error.

Why the reincarnated interest in hedge fund replication?  According to Reuters: More…

Thank you to those who participated in this year’s AllAboutAlpha/Terrapinn 130/30 poll.  Despite being distracted by market events of the past month, response rates were largely the same as last year across most categories and geographies.  We just finished re-counting the “pregnant” and “hanging” chads last week and can now provide you with the results.

Before we dive into the highlights below, the usual caveats should be issued.  Like last year’s survey, the respondents to this year’s edition are 100% self-selected.  As a result, they may likely be biased toward 130/30 investing already.  On the other hand, this was also the case last year.  So comparisons between the two polls may still be somewhat instructive.

Demographics

To fully understand the results, it’s helpful to quickly tell you about the broad demographics of the 100+ respondents.  Asset managers comprised a larger proportion of this year’s respondents due to a drop in the number of end investors filling out the survey.

This drop could be a result of the recent market calamities (filling out online surveys may not be at the top of most investors’ priority lists right now), or it could mean that investors are just not into 130/30.  However, analysis of the (smaller) sample of investors suggests that interest remains significant.

Response was also higher from North America and Europe than it was last year. This may have simply been a result of the particularly mailing list used to alert people about the survey.

More…

The short-term future of 130/30 funds has been thrown into doubt as a result of the short selling ban over-staying its welcome.  Consultancy the Tabb Group made headlines last year with its prediction that the market for 130/30 funds would reach $2 trillion by 2010.  But according to a Financial News report on the weekend,

“…Larry Tabb, chief executive of Tabb, said: “I do not see how these funds can work if they can’t short. The whole model may be in jeopardy.”

The article goes on to say that Tabb has substantially revised its predictions for 130/30 sales.  And he may well be right.  Invesco, for one, has taken a pending Australian 130/30 fund off the barbie for now.

As we have reported before, many 130/30 funds performed poorly in August 2007 because most tend to be quant funds.  That tendency to use quant models has apparently bitten 130/30 funds in the butt once again.  As one expert told Financial News:

More…

In March 2007, Asian Investor reported that the dawn of 1X0/X0 investing was close at hand in Japan.

“Large Japanese fund managers are looking to develop their own hedge-fund strategies as their local clients increase their exposure to such products. One of the most talked-about of these now are 130/30 strategies, which involve a 130% long position and a 30% short position, with the proceeds from the short helping to pay for the additional long exposure.”

With several mega-institutional investors and a $120b public pension fund that has recently upped its hedge fund allocation, you’d think the sun would shine on short-extension strategies.

But this month, the magazine reports:

“…2008 was supposed to be the year when the giant pension funds of Japan began to experiment with active extension structures. So far, it hasn’t happened. And while fund managers flogging these quant products say it’s just a matter of time, the possibility that 130/30 strategies and their ilk never gain traction is something to consider.”

Asian Investor cites several reasons for the slow uptake.

Firstly, it says that many Japanese institutional investors view 130/30 as a sort of proto-quant strategy.  And like all quant strategies, it should be avoided.  Second, investors can’t figure out if 130/30 funds are hedge funds or long-only funds.  Third, Japanese investors are still trying to come to terms with risk control, and fourth, the fees are different than traditional long-only funds.

I asked Ted Uemae, President of AIMA’s Japanese chapter what he thought of these developments (or lack thereof).

More…

Hedge Funds Review reports that S&P is telling clients that 130/30 is “strategy to watch in 2009” (no word on what to watch now or for the next six months - but it’s an ugly year anyway).

Taking a page from Andrew Lo, co-author of the recent academic paper “130/30: The New Long-only“, S&P’s Srikant Dash told a London audience earlier this week that “Asset managers are moving into this area and eventually these funds will take a significant share from traditional active funds”.

This year may not be a bust though.  Referring to one particularly aggressive market estimate, another S&P official apparently said 2008 could also be shaping up to be a barn-burner:

“I know of one analyst who predicted there would be $1.6 trillion by the end of 2008 linked to 130/30 funds”.

According to Hedge Funds Review, S&P is launching two new 130/30 indices later this year.  This, after an S&P-authored research paper recently argued that the best benchmark for 130/30 funds is probably a long-only index (see related posting, read report).  Maybe that was a different “S&P” (?)

Earlier this month, Pensions & Investments held a tri-city 130/30 dog-and-pony show in San Francisco, Chicago and New York.  And this week, they released several presentations given at the event.  So if you happened to have missed the show when it came through town, you might be interested in seeing the slideware available here at P&I.  Below we give you our take.

John Power of Pyramis gave a succinct overview of the rationale, costs and benefits of 130/30 that also included what has probably become the most popular slide in any 130/30 presentation:

The key message, of course, is that you simply can’t bet against most names in the index in a significant manner.  In our view, the difference between underweighting a 0.5% position by 0.5% and underweighting it by, say, 0.6% isn’t significant from an investment standpoint (some might argue the requisite introduction of short-selling brings with it some new operational issues).

More…

There seems to be a growing level of agreement that 130/30 is different than simply adding together a 100 portfolio (e.g. an ETF) and a 130/30 portfolio (e.g. a market neutral fund).  Some practitioners have pointed to the untrimness of being long and short some of the same stocks (e.g. Jacobs & Levy - see related posting).  But others such as First Quadrant’s Jia Ye have argued that adding a short-extension will not always be optimal even for the alpha-producing manager due to the potential volatility of the information coefficient (see posting).

Today, guest contributor Srikanth Iyer, Senior VP and Senior Portfolio Manager, Global Systematic Strategies at Guardian Capital LP puts these two ideas together by exploring whether a so-called integrated 130/30 portfolio is always optimal.

130/30 “Combined” vs. “Integrated”: The Tail Wagging the Dog 

Special to AllAboutAlpha.com by: Srikanth Iyer, SVP, Guardian Capital LP

The rapidly evolving landscape of 130/30 has seen many investment concepts used in interchangeable and often inappropriate ways.  As more players enter this space, it’s likely that we will see a further dilution of these core concepts.  The debate between a combined and integrated approach to active extension strategies is a classic example of how important concepts relating to return and risk are being bypassed to placate existing investment approaches.  The demands of business development add further confusion to the discussion about 130/30 strategies.

An integrated 130/30 portfolio is created using a mean-variance optimizer that uses the correlations between individual long and short securities to achieve an optimal mix for a given risk budget or ex ante tracking error.  In contrast, a combined 130/30 portfolio combines an existing mean-variance optimized long only portfolio with an integrated 30 long/30 short portfolio - effectively, combining a long only beta adjusted return with a zero-beta market neutral return.

The chart below from a recent report by Credit Suisse illustrates the subtle differences between these two approaches. (left=integrated, right=combined)

More…

In a follow-up from a posting last week, Terrapinn’s Quant Invest 2008 folks in London just completed a survey of the institutional investment intentions of 120 pensions, endowments, insurance companies and family offices.  Right in the middle at 63% is, you guessed it, 130/30…