Regular readers may remember our survey of attitudes toward 130/30 funds last August. Since that survey, several others (e.g. Merrill Lynch, Vodia Group) have come up with similar numbers – about 15-17% of institutions actively investing in 130/30 and another 25-30% considering investments in the next 12 months. Today, Kathryn Wilkens tells us of a recent survey of practitioners (members of the Chartered Alternative Investment Analyst Association) on this topic in our regular installment of “Alternative Viewpoints”.
A true advocate of alternative investments herself, Kathryn Wilkens received a Ph.D. in finance at the University of Massachusetts in 1998, and received a Center for International Securities and Derivatives Markets (CISDM) fellowship in 1997. She was on the CAIAA’s advisory board from the program’s inception in 2002 though 2005, and is now the CAIAA’s Director of Curriculum.
Alternative Viewpoints – powered by CAIA
Special to AllAboutAlpha.com by: Kathryn Wilkens, Ph.D., CAIA
Last month, 440 CAIA members responded to a survey on 130/30 funds and I presented the results at Terrapinn’s 130/30 conference in Santa Monica. The survey questions were structured around two main themes frequently discussed here at AllAboutAlpha.com:
- What is the most appropriate benchmark for 130/30 funds?
- What best describes your opinion about 130/30 funds?
When I posed the first question to the attendees at the Terrapinn conference, all but one responded that a standard long-only equity index such as the S&P 500 index or the Russell 2000 is the appropriate benchmark for 130/30 funds. Yet Dow Jones, Credit Suisse, and S&P have all recently developed 130/30 indices (see related AAA postings Dow Jones joins the 130/30 Index Parade, S&P follows CS into 130/30 index business, 130/30 Indices: True indices or like playing chess against a computer?) Two of these indices are classified as a type of Strategy Index with another being a so-called fundamental index.
To confuse things further, an index does not have to be a benchmark. But benchmark choice of course, impacts the perceived performance. As Jason Hsu of Research Affiliates recently observed in Global Pensions magazine, We’re still a fair way away from having consultants say â€˜why don’t you change your benchmark away from the standard cap-weighted benchmark and use a FTSE RAFI benchmark?’ But they have no problem recommending it as an investable product.”
A few recent postings on this website have addressed the issue of whether or not 130/30 funds are a fad or trend and whether or not they can really deliver superior returns. (e.g. In parliamentary-style debate 130/30 compared to a Cabbage Patch Kid, Roger Clemens, and an old pickup truck and Media turns hostile: 130/30 now dubious overblown faddish hype)
As the survey results discussed below indicate, the answers to these two questions depend in part on whether or not one believes if 130/30 funds are an Alternative Investment and how familiar one is with 130/30 funds. Answers are not unanimous in any case, but the most frequent response to this second question is best described by what Man Investments’ Angelo Calvello has called 130/30 funds: “A truck stop on the way to portable alpha.
When asked if 130/30 funds were an Alternative Investment, approximately half of the 440 responding members replied yes.
Almost 60% of responded that a 130/30 index (e.g., the Credit Suisse or S&P) is an appropriate benchmark for 130/30 funds in contrast to, as the Terrapinn conference participants believe, a long-only benchmark.
Almost half of the members described 130/30 funds as a truck stop to portable alpha (i.e. better than long-only, but not as good as being totally unconstrained), with a quarter describing the funds as largely managed by unskilled short sellers and a quarter describing them as a new investment paradigm with several benefits.
The 228 members that answered yes to Are 130/30 funds are Alternative Investments? were more likely to agree that a 130/30 benchmark should be used (68% versus 32% for a long-only benchmark) and had a more favorable opinion of 130/30 funds with 34% (versus 25% overall) responding that 130/30 funds were a new investment paradigm with several benefits.
Those who were felt 130/30 funds were indeed alternative investments and who also described themselves as being familiar with these funds were slightly less likely to believe that a 130/30 index was appropriate (62% vs. 68%). Still, a slightly higher proportion of this group had a favorable opinion of 130/30 funds (35% vs. 34%).
Of the 61 members (14% of respondents) that are actively involved in making decisions related to investing in 130/30 funds, 26 (less than half) believed that 130/30 funds were “alternative investments”. Of these 26 members, fewer than average agreed that a 130/30 benchmark is appropriate (52% v. 68%) and more had a favorable opinion of 130/30 funds (54% vs. 35%).
The question generating the largest consensus, regardless of how the data is filtered, is how much attention 130/30 funds should receive in the CAIA curriculum. The majority (74-84%) of the members indicate that within the CAIA curriculum, 130/30 funds should be a minor discussion within a larger context.
A good example of this is in a paper just published in the Journal of Portfolio Management by Mark Anson, The Beta Continuum: From Classic Beta to Bulk Beta, Winter 2008. In this paper, Anson describes 130/30 funds as providing exposure to active beta and he places 130/30 funds along a continuum that includes traditional funds, hedge funds, fundamental indices, and other investment vehicles.
So despite some of the media hype around 130/30, CAIA members might agree with the assessment on these pages a few days ago that 130/30 isn’t a whole new type of investment strategy, but is instead just a “common sense approach for those who believe in active management”.
The opinions expressed in this guest posting are those of the author and not necessarily those of AllAboutAlpha.com.