The Association of Investment Management Sales Executives (AIMSE) bills itself as an “educational forum for those employed in the investment management sales and marketing services profession worldwide” to help its members “adapt to the changing needs of the marketplace”. That mission was on display earlier this month in Scottsdale, Arizona as hedge funds and 1X0/X0 played central roles at the organization’s 30th Annual Marketing & Sales Conference.
A panel at the conference entitled “130/30 and other Hybrids: How to Turbo-charge Strategies for Long-only Managers” involved representatives from Northern Trust, RogersCasey, and Acadian Asset Management. The slideware from that session provides some interesting insight into the how the traditional institutional sales community is addressing 1X0/X0.
Along with slide presentations from all the panelists involved with the discussion, AIMSE has posted what appears to be a set of discussion questions. Unfortunately, the answers aren’t available. But the questions speak for themselves:
- “What took so long? Why now?”
- “Who is best suited to manage and why? Quantitative Managers V Fundamental Managers.”
- “When does 130/30 become a hedge fund?”
- “Could capacity in the aggregate become problematic as the strategy continues to gain traction and shorting volumes increase?”
- “What effect does shorting have on portfolio risk?”
- “Optimal leverage Is 120/20 better than 130/30? Should the ratio be fixed or floating?”
- “For clients (such as public plans) who are into securities lending, can they lend to themselves?”
- “Fees + Other Costs to Clients?…Flat or performance-based?..30% higher than a long-only fee?”
- “What do you call it and how do you position it? Traditional or Alternative?…Proper Benchmarks?”
Panelist Jeremy Baskin, Director of Active Quantitative Strategies at Northern Trust Global Investments, reviewed the basics using the following two charts to illustrate the freedom of expression enabled by modest short-selling.
His first chart (above) shows the weightings of a typical long-only fund (with an apparent position concentration cap of +60 bps). Note the maximum possible active bet against each name is dictated by the proportion of the index represented by that name. So for large caps, active bets against a stock can routinely amount to -60 bps. But for most of the universe, active bets against each stock are capped at less than 20 bps.
His second chart (below) shows how those active bets can be much larger by adding the ability to short (again, with an apparent short position concentration limit – this time -40 bps).
Note also how the cash generated through the shorts is applied to more (although notably not larger) long positions.
Jack Gastler of Acadian Asset Management seemed to suggest that 130/30 isn’t going to face a capacity constraint any time to soon. Said his slides:
- “Considerable depth in the short inventories of MSCI World index securities.”
- “Less than 10% of index securities have no short inventories.”
- “On average, each security has about 4% of its free-float shares outstanding available for shorting â€“ this is not a function of company size.”
In addition, Gastler submits this paper on short extension strategies by Acadian that includes some pretty nifty scatter plots that make essentially the same argument Baskin did, but compares the removal of the long-only constraint to the removal of other constraints (e.g. country, industry etc.)
- Should the management fee be based on dollar net exposure or on gross exposure?
- Should management fee be tied to expected alpha?
Park also submits his own November 2006 article on 120/20. In it, he uses some refreshingly frank language to describe what’s at stake in the battle for 1X0/X0 supremacy:
“The 120/20 managers take great pains and go to great lengths to defend why the 120/20 portfolios belong in the traditional camp versus the alternative camp where the hedge funds and other alternative investments reside. To a casual observer product positioning may appear trivial, but for the 120/20 managers implications of product positioning and assets that follow as a result are anything but trivial. In the context of the overall plan asset allocation, consider the size of assets that are allocated to the traditional equities versus hedge funds. Even with the outflow of funds from the traditional equities to the hedge funds, the former dwarfs the latter in terms of dedicated assets. Bottom line, the 120/20 managers would like a piece of the much bigger pie.”
Park also presents some proprietary research on 120/20 fee structures. According to RogersCasey, the average 120/20 manager charges 77 bps per annum – 15 bps higher than long-only large cap active managers. Fair enough, says the firm. But it also suggests that the inclusion of a performance fee by several 120/20 managers was downright hypocritical:
“Certainly managers deserve to be fairly compensated for their value-added service but charging a 20% performance based fee simply because shorting is allowed does not seem equitable, especially when they go to great lengths to defend why the 120/20 portfolios are an extension of traditional portfolios. They cannot claim (from the product positioning standpoint) that the 120/20 portfolios are traditional portfolios and in the same breath claim that they deserve to be paid like hedge funds because they possess hedge fund characteristics (mainly shorting).”
Still, RogersCasey’s own recommendation is that 120/20 managers charge a performance fee on the 20/20 portion. So apparently they don’t dislike performance fees that much.
So there you have it. If you’re an institutional investor, get ready for presentations much like these for the next year. And if you’re an institutional sales person, this is your new sales presentation benchmark for 1X0/X0 RFPs. Let the games begin.