Traditional and alternative investment managers now find themselves competing in a new battleground that combines the (1.0) beta exposure and quantitative methodologies of traditional indexed investment vehicles with the shorting and hedging strategies of alternative products.
Also called “long-enhanced products,” or “active extension products,” 130/30 funds–or for that matter 120/20 funds and 150/50 funds–are products with a net exposure to the market of 100%.
For instance, in the case of a 150/50 fund–a model used by Dallas-based Maverick Capital, Ltd., run by Lee Ainslie–out of a $100 initial investment, the manager shorts 50% of the portfolio and uses the proceeds to buy an additional $50 in stocks. With a $150 gross long exposure and $50 in shorts, the fund has a net 100% exposure to the market. The same concept applies for any gross long exposure from 120% to 160%.
So far, 130/30 funds, as they are generically called, have mostly emanated from large asset managers with strong quantitative pedigrees such as Goldman Sachs Asset Management, LP; State Street Global Advisors; ING Investments, LLC; Barclays Global Investors; or AXA Rosenberg Group, LLC. Hedge funds, including shops such as D. E. Shaw & Co., LP and Copernicus International, are the notable minority.
In July 2005, Maverick rolled out its first active extension product called Maverick Long Enhanced Fund, a product investing 150% in long positions and 50% in shorts, which makes for a net long exposure of 100%.
A Bottom-Up Fundamental Approach
“You hear a lot about 130/30 or 150/50 funds,” observes Ainslie. “Most of the offerings we have seen in this space have a quantitative approach. Although quantitative tools play an important role in our process, our investment decisions are driven by bottom-up, fundamental research. We believe this contrast makes Maverick’s offering quite different. In addition, our investment team has over 230 years of experience in shorting stocks, while many 130/30 managers come from a long-only background and will be shorting stocks for the first time. Shorting is a very different undertaking than buying and presents many challenges that these managers have never faced. If you look at the active extension offerings out there, we are not aware of other funds with results comparable to ours.”
Those results come with a price tag, however. In today’s marketplace, most fees for 130/30 funds tend to be lower than for hedge funds, since the cost is limited with the reduced use of shorting. But for its 150/50 fund, Maverick charges the same fees it does for its other funds.
“Our fee structure may be more expensive than some 130/30 fee structures, but our returns after fees appear to be much higher and less volatile. The fees we charge for our 150/50 fund are very consistent with all of our funds,” said Ainslie.
And that’s certainly a blurring of the lines between long-only and hedge fund investing.