130/30 vs. L/S Equity
hey everyone
I read a wikipedia article regarding the 130/30 strategy which argued that it was more of a long strategy that had some short exposure and therefore could not really be compared to a traditional long/short equity hedge fund. Instead it should be more viewed in line with its long-only peers as a proper comparison. I was not thrilled with the explanation given as to why this is the case especially since they have a fair amount of short exposure. Such that, while they do lean long, I would expect the returns of a 130/30 portfolio to have a significantly smaller correlation to the broader market than a long only fund. Any thoughts?
Thanks
130/30 strategies have 100% net equity exposure, where a long/short strategy will have between 0% and 80% (or even negative net exposure).
A 130/30 strategies are typically offered by quants, who are going to construct them to try to beat a particular benchmark - S&P500, Russell 1000, etc.
130/30 strategies are intended to be beta=1, benchmark-oriented, relative return products, while long/short products are intended to be more absolute-return products.
Do you know what's so special about 160% gross exposure? You could get the same net doing 150/50 or 200/100. Why specifically 130/30?
130/30 funds are meant to allow benchmarked managers to be able to underweight any stock they want while staying within their risk budget without the long-only constraint being binding. In other words, they want the same flexibility L/S managers benefit from when trying to beat their benchmark, at equal risk budget. If the short constraint is not binding anymore within their risk budget, why would they want more leverage than 160% gross exposure? The 130/30 magic number comes from the average risk level that such managers propose to their clients. They would not go beyond 130/30 unless it would allow them to implement their views more accurately.
There are funds that offer different combinations. 150/50 is a common ratio. http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/
That said, not all 1X0/X0 funds are benchmarked. Some of them are nearly market neutral, but with the benefit of providing 100% exposure to equities. These usually use much more leverage than 130/30 funds however.
I think often times a 130/30 strategy is used to allow a manager to make extremely high conviction shorts while still catering to the investor that will be furious if you underperform a benchmark. Most clients would prefer to underperform in a down year than underperform in a big up year for the market (this may seem odd but ask someone managing money).
130/30 Funds (Originally Posted: 04/05/2012)
What are your thoughts?
Cheers
If they have the stable outperformance to justify the charge then why not.
European dividend stocks are paying 6% dividends that track inflation long-term; meanwhile 99% of managers underperform their indices and that's before fees. Why give up ~150 basis points on top of that?
why don't they just call them 4.3333333 funds?
if it justifies the expense in terms of just pure outperformance without taking heavy sector bets why not--active short extension provided the cost of stock borrow isn't extreme sounds like a good deal to me.
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