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.

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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:

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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).

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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).

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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)

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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…

It’s shaping up to be a banner week for alpha-centric investing in Europe.  No sooner had the ink dried on one landmark alpha-centric mandate (see yesterday’s posting about a $3b European 130/30 mandate), when another major European institution announced it would dump some of its funds of hedge funds and place its bets on “alternative beta” (a.k.a. hedge fund replication) instead.

One of Sweden’s public pension plans, the EUR9 billion AP7, announced the news at a conference yesterday.  Reports IPE.com:

“Richard Grottheim, executive vice president of AP7, told delegates at the Pension Fund Investment World Nordic 2008 conference in Stockholm today the SEK 80bn (EUR8.6bn) fund had already reduced its allocation to hedge funds from 4% to 2% in 2007 because of ‘disappointing returns’ in the market.”

Grottheim told the gathering that he could get “the same returns” by investing directly in the risk factors that tended to drive hedge fund returns. (see previous posting on AP7’s alpha/beta separation programme)

But is this really the primary motivation for the move?  Since hedge fund of funds returns are reported net of fees, it appears as though AP7 won’t be any better off after the shift.  Granted, they won’t have to deal with the discomfort of making any fund of hedge fund managers rich (while they simultaneously aim to fund the retirements of hard working Swedes).  But how does this shift really make life easier for the pension plan?

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Apparently, 130/30 isn’t going away anytime soon.  Another survey of institutional investors released this month says that over half (51%) of public pension plans “are using, seriously considering, or evaluating” 130/30 strategies.  The number was significantly less for corporate plans (31.5%) - a phenomenon uncovered by some previous surveys as well.  On its own “considering” doesn’t mean a lot.  After all, a lot of people “considered” - and subsequently dismissed - the idea of buying ”New Coke” back in the 80’s.

So is 130/30 the New Coke of asset management?  Will we eventually pine for the “classic” version of our favorite active managers?  This survey, for one, suggests not - only 14% of pensions thought 130/30 was a “passing trend”.

This is another in a growing body of surveys on 130/30 (of which our 2007 survey with Terrapinn is a part).  So we thought this might be a good time for a re-cap.  Below is a quick list of all the 130/30 industry surveys we can immediately recall (in chronological order).  If we have missed any, please let us know.

2006

• Survey sponsor: Pyramis Global Advisors (Link to source)
• Survey conducted: October/November 2006
• Sample: 214 US public and corporate defined benefit pension plans with assets over $200 million
• Findings:
  7% using 130/30 strategies
  51% seriously considering 130/30 strategies

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Doug Kass of Seabreeze Investment Management, a veteran short manager and market commentator sure isn’t sold on 130/30.   The manager of $200 million of short positions tells Barron’s this week:

“These funds are a silly gimmick and their half-life will be short. Nearly every long/short manager thinks he is equally facile on the short side as the long. Shorting requires a different skill set; you have to have the mindset of an investigative reporter and be a skeptic at the core. Also, many 130-30 funds use exchange-traded funds [ETFs] as a proxy to short. That’s a cop-out and a poor way to produce excess returns.”

There’s no question shorting requires “a different skill set”.  But like any skill-set, these skills can be bought and sold by participants in the asset management industry - enabling long/short managers and even (gasp!) long-only managers to rapidly move onto a level playing field with seasoned short-sellers.  Unless you consider some kind of inherent culture that makes for successful shorting, no asset manager can hope to erect barriers to entry in this burgeoning niche.  In our view, it’s just not that fundamentally unique when compared to long-only or long-short.

Long-only managers have been immigrating to the Republic of 130/30 for some time.  Now the republic’s other border (the one it shares with Hedgistan) is also experiencing an increase in traffic.  Italy’s Banca Fideuram handed over a whopping $3 billion mandate to hedge fund behemoth GLG recently.  As HedgeWorld reports this week, the bank says: More…