Mutual fund investors now boarding the 130/30 express

130/30 16 May 2007

While 130/30 funds (nee long-bias hedge funds) have become all the rage for institutional investors such as pension funds, here is more evidence that the strategy also represents a hedge fund Trojan horse with retail investors.  Russell Investments recently announced that it would add more 130/30 to two of its retail mutual funds (press release).

Says the firm’s May 1st press release, it is 130/30-izing its Quantitative Equity and Equity Q Mutual funds (both subadvised in part by Aronson+Johnson+Ortiz) to “provide upside return potential without significantly increasing risk at the total fund level.” (interesting sidebar: Aronson+Johnson+Ortiz calculates its fees on gross assets managed.  So a 130/30 mid-cap strategy costs 160% of a regular mid-cap strategy.)

Russell has probably done a lot of homework here – and press releases such as this tend to go through extensive internal filtering.  So the way the firm positions these funds can provide insight into the trends that are pulling them into existence.  For example, advisers know that 130/30 is essentially the same as 100 + 30/30.  Russell’s press release acknowledges the plethora of market neutral offerings available today, but says their offering has two advantages:

“While there are a multitude of standalone alternative products available, it can be difficult and time consuming for financial professionals to comprehensively evaluate these new strategies and then build them into existing client portfolios.”

The first part of this value proposition – fund evaluation – is not really unique to 130/30.  However, we suppose an argument can be made that 130/30 is simpler for advisers since it maintains a more stable ratio between the beta and alpha portions of the portfolio.

But in case you thought Russell was just another 130/30 Johnny-come-lately, they want to remind you they have always been fans…

“The addition of the 130/30 long/short strategy follows the August 2006 addition of another limited long short strategy, a 120/20 strategy, by another of the funds’ managers, Jacobs Levy…Russell will hold more than $5.3 billion in limited long/short strategies in its funds, and is among the largest purchasers of these innovative strategies in the world.”

Curiously, though, there was no similar press release for the 120/20 mandate last summer – suggesting that 1X0/X0 has since become a matter of marketing import for the firm.  (sidebar: Jacobs & Levy of Jacobs Levy wrote the book on market neutral investing and staked their claim in the 1X0/X0 gold rush with this Spring 2006 article in the Journal of Portfolio Management on the strategy).

With Jacob Levy’s 120/20, the Quantitative Equity Fund already had a modest level of short-selling.  But it seems that Russell still has a long way to go if it wants to provide a full 130/30 experience to its clients.  As of March 31, 2007, the fund had about $160m in short positions and about $4 billion in equity.  In other words, it was a “104/04” fund.

Hey, it’s a start, right?

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