130/30 a “silly gimmick” or a ($3b) “important new mandate”?

130/30 19 May 2008

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:

“GLG has a proven track record of alpha generation capability and our existing relationship gives us great confidence in their ability to manage this important new mandate and create additional value for our investors.”

That’s Italian for “It’s all about alpha”.

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