But before all you 130/30 providers send your pitch books to the Cambridge Retirement Board, check out some of the questions. Here are a few listed under the heading “Minimum Criteria“:
- The firm has at least 3 years of experience providing investment services in the “Proposed Product”.
- The firm has updated Evestment Alliance database for the products that are being submitted as of 9/30/07 (i.e. firm profile, product profile, investment strategy/philosophy and investment professionals).
- The performance of the “Proposed Product”/Composite has outperformed the S&P 500 over the three year trailing period ending 9/30/07.
As we discussed yesterday, the concept of 1X0/X0 only entered popular dialogue about 5 years ago. In fact, Gordon Johnson (of Wednesday’s posting) did an analysis of real 130/30 funds in the eVestment Alliance database and finds their numbers to be, shall we say, a little thin. Johnson found that 34 companies listed 1X0/X0 funds in the eVestment Alliance database as of June 30, 2007, and only 10 of them had a track record of three years or more.
Data submission to eVestment Alliance is, of course, not compulsory (although with RFPs like this, it may effectively become so). So Cambridge is apparently missing out on some big names. For example, Johnson found that as of June 30, Jacobs Levy – a name synonymous with 1X0/X0 – listed most of its long-only funds in eVestment Alliance’s database but none of its multi-billion dollar 1X0/X0 funds.
As a result, eVestment Alliance doesn’t even list the vital stats on 130/30 funds yet. But eVestment Alliance says things are rapidly changing. Health Wilson, founder of the firm tells AllAboutAlpha.com:
“Extended Equity products were virtually non-existent in the eVestment database until late last year. Early this year we noticed quite a few extended equity product additions to the database (130/30s, etc). So many, in fact, that eVestment decided to build universes or peer groups for these product types eVestment now maintains the following universes: eA Extended US Equity (35 Firms, 41 Products), eA Extended US 130/30 Equity (29 Firms, 35 products) and eA Extended Intl / Global Equity (7 Firms, 9 Products).”
Wilson says that one of the challenges eVestment Alliance faces when tracking 130/30 products is that some include simulated performance as part of their track record. While the firm asks managers to specify if any returns are simulated, Wilson says it can still appear that some of these products have 5-10 years worth of return data when in fact the actual managed track record is shorter. He adds that, not surprisingly, the vast majority of these 130/30 products are managed by traditional managers (versus “true hedge fund firms”).
But while Cambridge might find it slim pickings, at least there is a good chance that the 130/30 funds they do find will have met the third “minimum criteria”. According to Johnson’s research on actual 130/30 funds with long-only sister funds, the 130/30’s have actually done quite well.
In any event, here are the 10 questions Cambridge had for potential 130/30 providers and below that is eVestment Alliance’s current listing of 130/30 managers.
Cambridge Retirement Board’s 10 Questions (source: RFP)…
- List all the 130/30 products under management, assets, and inception dates.
- How many short positions and how many long positions do you have in the portfolio?
- If your 130/30 strategy is an extension of a long only strategy, what are the differences in the style profiles, turnover, risk controls, model implementations, attribution expectations, tracking error and excess returns, cash held, beta, benchmark/universe?
- What is the rationale for allowing a limited amount of shorting (up to 30%) in a traditional long-only portfolio? How are the product’s risk and return characteristics expected to change? Would any other portfolio characteristics change significantly? Have your risk characteristics changed since inception?
- What are the 130/30 strategy’s gross leverage ratio and net leverage ratio targets? How did you arrive at those targets? Will the targets vary over time?
- How are short opportunities identified? If a ranking system is used, what quantitative or qualitative process is used to select candidates for shorting? What other factors are considered (e.g., liquidity, short interest, cost to borrow, industry exposure, etc.)?
- Have you made any additions or changes to your research process in order to refine the process used to identify short opportunities? Please explain.
- How are the proceeds of the short sales re-invested? To what extent are the proceeds re-invested in stocks already in the long-only portfolio versus invested in other long opportunities and why?
- Describe the portfolio construction process. Do you mandate a fixed amount of shorting (e.g., 30%) or is it flexible? If flexible, how do you decide how much shorting to allow?
- What is the smallest and largest position (%) you will hold in a portfolio? How is this different for long vs. short positions?
eVestment Alliance’s listing of 130/30 funds as of September 20, 2007 (Source: eVestment Alliance) …