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Alpha From Undervalued and Overvalued Securities

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UBS has launched a new fund that will leverage the equity research that UBS Global Asset Management already does, and endeavor to capture alpha from both under-valued and over-valued U.S. equity securities. It is a 130/30 long-short equity strategy in which the portfolio’s managers will sell-short overvalued securities worth 30% of the portfolio’s nominal value, and take the proceeds from the short sales and buy 100% plus another 30% of the portfolio’s value in equities it deems undervalued.

“Determining fair value,” says Thomas Digenan, “is what we’ve been doing for 25 years: our primary job is to value securities.” Once they’ve determined the fair value, they compare that to its current price, “and then execute on the differential.” There are opportunities–”mis-pricings,” that can provide and additional opportunity for alpha. Based in Chicago, Digenan is North American equity strategist, and managing director at UBS Global Asset Management, and part of the portfolio management team for the UBS U.S. Equity Alpha Fund (BEAAX), a new retail offering. The fund has about $90 million in assets so far, but is based an institutional sibling with about $800 million in assets.

“Historically we’ve been able capitalize on half the mis-priced securities” by buying those for a portfolio, but when securities are overpriced “you really are leaving a lot on the table, because when you’re building a portfolio sometimes your best insights are on securities that are overpriced.” In traditional long-only mutual funds they are left out (we hope), as there was not a way to exploit them in a long-only fund, whereas in a long/short fund, managers can take advantage of an overpriced security by selling it short.

Put simply, the premise is for the portfolio managers to identify what is a company’s fair value, and then take a long or short position based on that analysis, and allow the stock to return to fair value. Digenan expects the average holding period for long and for short to be as long as three years. On average, the fund will hold 50 to 70 long stocks and short 30 to 50.


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