Investors abandon 130/30 strategies

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.
Top-ranked JPMorgan Asset Management of New York saw its assets under management in 130/30 plunge 21.8%, to $7.77 billion as of March 31, compared with six months earlier, according to sister publication Pensions & Investments' semiannual survey. Barclays Global Investors of San Francisco, whose 130/30 assets fell 29.3% to $7.04 billion in the same period, came in second in the rankings.

Virtually all of the 21 managers who responded to the survey saw double-digit asset declines, proving that even the strongest players were no match for the markets. The in-creased risk — a result of leverage built into the strategies — also made them vulnerable.

Total assets under management in 130/30 or similar strategies, also known as active-extension strategies, collectively plummeted 32.9% for the managers surveyed, to $31.56 billion from $47.02 billion in the six-month period.

State Street Global Advisors of Boston was also hard hit, placing third in the rankings as of March 31 and suffering a 38% drop, to $3.01 billion from six months earlier.

“It's an investment in stocks where the manager has more tools to add value, but net-net, you are still fully invested in stocks,” said Paul Quinsee, chief investment officer of core U.S. equity for JPMorgan.

JPMorgan uses the Standard & Poor's 500 stock index as the benchmark for its large-cap-core-plus 130/30, its flagship strategy, he said. Between Sept. 30 and March 31, that benchmark fell 31.5%.

Mr. Quinsee described it as the “worst market in a very, very long time.”

The Russell 1000 Index dropped by 31.5% during the period; the Morgan Stanley Capital International Europe Australasia Far East index tumbled 43.1%.

“All equity strategies have fallen in that period, and 130/30 is no exception to that,” Mr. Quinsee said.

In relative terms, JPMorgan's large-cap-core-plus strategy outperformed the benchmark, which, given the circumstances, still counts for something. Mr. Quinsee noted that the firm saw positive inflows for 130/30 retail mutual funds.

He said that JPMorgan closed the strategy to institutional investors last year because it had grown too fast, but recently began making it available again on a limited basis.

130/30 MISPERCEPTIONS

Scott Bondurant, global head of long/short investments for UBS Global Asset Management in Chicago, said that even though 130/30 strategies clearly face head winds, “we think there is a lot of misperception” about the strategy.
“Some people don't realize or appreciate that the strategy is 100% net long in up markets and down markets, so it's designed to outperform the benchmark, but not provide protection in down markets,” he said.

Mr. Bondurant said that 130/30 has been unfairly punished because of that misperception.

UBS reported $892 million in assets under management as of Dec. 31, according to the company's latest available figures. That represents a 44.1% decline from Sept. 30.

Mr. Bondurant noted that $200 million of the drop was from a tax-aware fund which sold and realized tax losses that will be reinvested within the next six months.

Harindra de Silva, president of Analytic Investors LLC in Los Angeles, which saw its active-extension assets decline 35%, to $2.45 billion, also cited a misperception of 130/30 strategies among investors.

“Some have lost confidence when it was realized that this was not a hedge fund alternative,” he said. Those same investors might never come back to the strategy, but Mr. de Silva maintained that the ones who didn't fully understand it “probably shouldn't have bought it in the first place.”

In fact, one of the main appeals of the 130/30 strategy is its ability to be used as an equity substitute and fit into an equity allocation, rather than an alternatives allocation.

Most of the managers agree that the market was mainly to blame for the strategy's troubles.

Will Cazalet, director of global long/short equities for Axa Rosenberg Investment Management LLC in Orinda, Calif., said that 130/30's first real market dislocation test was in 2007. Then last year, there was the collapse of The Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc., both of New York, exposing 130/30 managers to counterparty risk.

“It would be an unfair environment in which to judge this strategy because it's been so extreme,” Mr. Cazalet said.

Axa Rosenberg's assets under management in 130/30 fell 33.3%, to $1.4 billion. Mr. Cazalet said that the firm managed to retain all its clients except for one European investor, which shifted its $200 million ac-count into Axa Rosenberg's long-only strategy.

When 130/30 began gaining popularity in 2006, many of those offering the strategy were “me-too” managers who jumped on the bandwagon, but might not have done a good job with their stock selections, he said.

It is very difficult to assess the strategy as a whole, and instead it should be looked at on a manager-by-manager basis, Mr. Cazalet said.

Those who succeed tend to have a rich set of ideas that allows them to outperform the benchmark, he said. They must also be skilled in short selling and in risk management.

“Managers who can demonstrate those skills should do well with these types of strategies over time,” Mr. Cazalet said.