130/30 once had “cool factor” now has fleas?

130/30 20 May 2009

130/30 has apparently gone from the cat’s meow to doggone unpopular.

P&I reports this week that investors are “abandoning” 130/30 strategies.  However, the reality, as the article goes on point out, isn’t quite as dramatic.  According to the magazine’s widely followed semi-annual survey of short-extension managers, 130/30 AUM is down a little over 30% over the past 6 months.  With year over year AUM down 20%+ for the asset management sector overall, this may not actually qualify as “abandoning” – but “shying away” to be sure.  Reports the newspaper:

“In a risk-averse environment, 130/30 has lost its cool factor, with investors shying away from the strategy after getting clobbered in the market downturn.”

At an estimates US$50b managed by a handful of money managers (see P&I league table here), short extension funds were never more than a nascent sector.  Like all new industries, percentage increases and decreases can look pretty dramatic.

This point is apparently not lost on several 130/30 managers interviewed by P&I.  The head of UBS’s long/short business told the newspaper:

“Investors are a little gun-shy right now, but once they think about the promise of 130/30 and as it plays out, they’ll again move toward it…”

And several others lamented that investors don’t seem to get the fact that 130/30 funds have 100% long exposure.

As we observed a few weeks ago, 130/30 funds seem to have performed about the same, on average, as long-only funds.  Both were high volatility schnauzers.

So we’d submit that the “hedge fund light” moniker often applied to the strategy has done it a disservice since investors may have assumed this meant 130/30 was just a hedge fund with a “lighter” volatility, not a “lighter” idiosyncratic risk.

If the AUM decrease seen over the past six months shows us nothing else, it’s that investors have a higher aversion to idiosyncratic risk than systematic risk right now.  (This also explains some of the increasing popularity of very-high-volatility index ETFs.)

130/30 is indeed a “cool” idea that puts to test the manager’s ability to actually produce alpha.  But recent markets have been rough on the bread and butter investment strategies underlying some 130/30 funds.  So, for now, we say they’re both cool and they’re dogs.  They’re cool dawgs.

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