Given how much we’ve read about them this seems hard to believe. But the UK is apparently poised to get its first 130/30 fund.
Shrugging off the deal-making of its majority owner, F&C is planning to launch within weeks what it thinks is the first 130/30 fund investing in UK equities, dubbed the F&C UK Enhanced Alpha fund.
So let the rejoicing be unrestrained, right?
Perhaps not. 130/30 funds, which bolt on a bit of long/short to a long-only portfolio, have got a rather mixed press in the US, where they are springing up everywhere. The market stateside has reached $50bn, estimate F&C, after explosive growth over the past five years.
The idea is that you combine a 100 per cent long portfolio to give you exposure to the overall market, i.e. beta, with 30 per cent short-selling and 30 per cent exposure to “high conviction” stocks - essentially an ETF plus a market neutral fund.
The name 130/30 is a tad misleading, points out Richard Wilson, the head of equities at F&C - though some might contend that accuracy be damned, it’s a great marketing moniker. There’s no magic to the number 30, and in fact the small-print on the F&C fund will allow it to go to 150/50. They also are not, he adds, a half-way house between long-only and hedge funds.
Indeed. A potential point of confusion that analysts at Merrill Lynch flagged up earlier in the year when predicting a “wave” of such launches: rather than absolute return portfolio, the funds are high conviction long portfolios, so are arguably a better substitute for long-only than for hedge fund investing.
So what’s has got some blogging commentaters in the US excised? Broadly, that this is not new - let alone innovative or different. The All About Alpha blog covered this, and Merrill’s report, back in March:
The recent hype is obfuscating the truth about 130/30: it’s simply another marketing package delivering an ETF and a hedge fund. In other words, 130/30 is simple alpha-centric investing, not some new asset class….Aside from a few academic arguments, the debate about 130/30 is one of perception, not reality; communication, not substance; and marketing, not finance.
The attention generated by 130/30 is frustrating, the Alpha Male added, but the concept does seem to be a step in the right direction from the polarised world of long-only and pure hedge fund. And if the idea really takes off, he wrote in a post on Tuesday, there could be an interesting fallout from having a wave of investment that shorts in the run of everyday business, or non-cyclically, rather than as a bearish bet on stocks in general.
Others though question whether 130/30 can live up to the promise. Roger Ehrenberg, at Information Arbitrage is highly sceptical, calling it the “worst of all worlds.” He argues that if, as a manager, you’re great at picking shorts, then why limit yourself to 30 per cent?
Answer: they wouldn’t. They would go to a place where they could use their shorting skill to its fullest, namely, in a real hedge fund, not some bastardized, watered-down version. So, basically we’re talking about adverse selection in action.
And, he argues, with the risk management principles fundamentally different on the short and long sides, a skilled long-only manager adding a bit of spice to life with some shorting is a dangerous game. Caveat emptor. He sees the concept as a means to charge higher fees on a fund that is more scalable than a straight hedge fund.
F&C point out that, contrary to what is sometimes suggested, the shorted stocks don’t actually have to fall in value for the strategy to be successful - which if Ehrenberg is right is probably just as well. The 30 per cent short just need to under perform in aggregate the 30 per cent invested in active long positions.
What is almost certain is that the F&C launch is likely to be the first of many. And that, at the very least, 130/30 must offer the rather unsexy long-only houses a way to jazz up life for their most talented managers - and hopefully dissuade them from jumping ship to the nearest hedge fund.
For example, the new F&C fund will be in the charge of Luke Newman and Makis Kaketsis, two of its “rising star stock pickers.”
