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.

 
raisondebtre:
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?

 
Isuckatlife:
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.

 

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).

 
Best Response
lotsofquestions:
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).
I completely disagree with this. We would far rather invest in a manager that will outperform in a down year (half the loss in 2008 for example) and is then able to keep up with the market or narrowly underperform in a bull year....the compounding impact of losing a lot of money in any year is far more painful than missing a tiny bit of the return in a frothy market.

Career Advancement Opportunities

March 2024 Hedge Fund

  • Point72 98.9%
  • D.E. Shaw 97.9%
  • Magnetar Capital 96.8%
  • Citadel Investment Group 95.8%
  • AQR Capital Management 94.7%

Overall Employee Satisfaction

March 2024 Hedge Fund

  • Magnetar Capital 98.9%
  • D.E. Shaw 97.8%
  • Blackstone Group 96.8%
  • Two Sigma Investments 95.7%
  • Citadel Investment Group 94.6%

Professional Growth Opportunities

March 2024 Hedge Fund

  • AQR Capital Management 99.0%
  • Point72 97.9%
  • D.E. Shaw 96.9%
  • Citadel Investment Group 95.8%
  • Magnetar Capital 94.8%

Total Avg Compensation

March 2024 Hedge Fund

  • Portfolio Manager (9) $1,648
  • Vice President (23) $474
  • Director/MD (12) $423
  • NA (6) $322
  • 3rd+ Year Associate (24) $287
  • Manager (4) $282
  • Engineer/Quant (71) $274
  • 2nd Year Associate (30) $251
  • 1st Year Associate (73) $190
  • Analysts (225) $179
  • Intern/Summer Associate (22) $131
  • Junior Trader (5) $102
  • Intern/Summer Analyst (249) $85
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”