Increasingly popular quantitative investment strategies that maintain consistent long and short exposures, commonly known as 130/30s, passed a significant test by holding fast during market volatility last month, according to investment research firm Morningstar Inc.
“Apparently, the strategy does cushion investors from the full-blown hedge fund approach,” said Steve Deutsche, Chicago-based Morningstar's director of separate accounts and collective investment trusts.
In analyzing the performance of 38 of the 74 separate account strategies and registered 130/30 funds tracked by Morningstar, Mr. Deutsche found that the average return last month was flat.
That compares with a 1.5% return by the Standard & Poor's 500 stock index and a 1.6% average decline for the comparable hedge funds in Morningstar's hedge fund database last month.
In a 130/30, a fund manager shorts 30% of the portfolio and uses the proceeds to go long an extra 30% in areas where growth is predicted.
Part of the appeal to investors is the cost, which doesn't include the extra performance fees typically associated with hedge funds.
Mr. Deutsche said that it is still too early to christen 130/30 strategies the new paradigm of investing, but he did acknowledge the significance of maneuvering through the volatility of August relatively unscathed.
“Traditional money managers are testing out the strategy, which will eventually lead to a rollout to a wider retail audience,” he said.
However, Mr. Deutsche added, greater distribution through a wider range of products also introduces the potential for more risk and confusion.
The strategy's success has already led to variations such as 140/40 and 120/20 funds.
And Wilshire Associates Inc. in Santa Monica, Calif., last month filed with the Securities and Exchange Commission to offer what could be the first multi-manager 130/30 fund.
