Assets, managers in 130/30 strategies surge

Assets in 130/30-type strategies climbed 77% during the six-month period ended Sept. 30, topping $53 billion, from $30 billion, according to a survey conducted by sister publication Pensions & Investments.

And the number of managers with 130/30-type strategies soared to 54, from 33.

In such a strategy, the managers put 100% into an index, sell short on the weaker 30% of the index and use the proceeds to go long on the stronger end.

Six managers with quantitative approaches are responsible for 61% of the assets run in these wildly popular strategies, which allow managers to leverage their equity portfolios up to a set level while permitting them to go short an equal amount.

The six are State Street Global Advisors of Boston, Barclays Global Investors of San Francisco, Jacobs Levy Equity Management of Florham Park, N.J., Goldman Sachs Asset Management of New York, Analytic Investors Inc. of Los Angeles and Aronson + Johnson + Ortiz LP of Philadelphia.

There is still room in the pool for more managers to jump in, consultants say.

“It’s not like indexing, where it all comes down to having economies of scale,” said Chris Meyer, a managing principal and chief investment -officer at Fund Evaluation Group LLC, an investment consultant in Cincinnati.

“If we continue to see assets flow in, you’ll just see more managers offer products.”

In the six-month period ended Sept. 30, searches for 130/30 and 120/20 strategies outpaced those for hedge funds, funds of hedge funds and most other alternative strategies, said Keith Black, associate for the opportunistic-strategies group at Ennis Knupp & Associates of Chicago.

“The majority of searches in the last six months have been for 130/30 and [specialized] fixed-income products,” he said.

Most of the assets in 130/30 strategies (also known as short extension or active extension) are held by quantitative managers, though Mr. Black said fundamental managers are starting to make some inroads, as well.

The asset total in P&I’s survey was lower than some other industry tallies, which put the amount invested in 130/30 strategies at up to $75 billion. One reason is that the $17 billion Renaissance Institutional Equities Fund wasn’t included, because the fund, which uses a 175/75 strategy, has a beta of 0.4, according to sources familiar with the fund.

Typically, active-extension strategies have a beta of 1, giving them full equity market exposure.

Renaissance Technologies LLC, which offers the fund, is based in East Setauket, N.Y.

Another factor is that some other surveys counted strategic allocations made by pension funds and other institutions that hadn’t yet been awarded to individual managers. P&I’s survey counted only those assets run by 130/30 managers.

Sarah Barratt Ball, executive director of New York-based Morgan Stanley’s prime-brokerage unit, said that it isn’t surprising that many of the largest active-extension managers are household names.

“Pension funds are learning about the product from the managers,” she said. “The ones who can distribute that thought process to the pension funds are the ones who have the large distribution channels.”

The August market drop helped fundamental strategies get more attention.

Many quantitative models suffered in August, and as a result, many money managers who use those models experienced poor returns in their 130/30, market-neutral and long/short strategies.

The drop didn’t cause clients to terminate 130/30 mandates with quantitative managers, Mr. Black said, but it helped validate managers with fundamental 130/30 strategies.

The two largest managers of -fundamental strategies have had significant growth this year. Active-extension assets run by New York-based JPMorgan Chase & Co.’s asset management unit had more than doubled to $3.3 billion by Sept. 30, from $1.5 billion at the end of the first quarter.

Most of the money is run in fundamental active-extension strategies, but $28 million is in quantitative 130/30.

UBS Global Asset Management, a fundamental manager, had $2.3 billion in active-extension assets as of Sept. 30, up $1 billion from the amount at the start of the year.

“We’ve seen a dramatic change in where the growth is coming from,” said Paul Quinsee, chief investment officer of core equity for JPMorgan’s asset management unit.

From 2004 to 2006, nearly all the money moving into JPMorgan’s active-extension strategy was from clients with traditional long-only strategies run by the firm converting to the new vehicles. This year, nearly half has come from new clients, not conversions of existing portfolios, Mr. Quinsee estimated.

A three-year track record and growing acceptance of 130/30s drew new clients to JPMorgan, he said.

Officials at SSgA, the largest manager of active-extension strategies, with $11.7 billion, also are seeing new business coming from new clients. Ric Thomas, managing director and head of SSgA’s North American enhanced-equities group, estimates that 30% to 40% of SSgA’s active-extension assets have come from new clients this year and last.

While the vast majority of 130/30 assets come from defined benefit plans, Mr. Thomas said, endowments and foundations are starting to take notice.

A dozen endowment or foundation clients have hired SSgA for active-extension portfolios in the past year. Mr. Thomas declined to name any.

As more tax-exempt institutional investors take a look at 130/30 strategies, questions tend to center on the shorting aspects of the active-extension strategy.

“Clients are familiar with the long side. It’s the short side they’re trying to get their arms around,” said Shelly Heier, a consultant at Wurts & Associates of Seattle.

Clients want to know how the manager is improving the portfolio by shorting certain stocks, she said.

JPMorgan executives said clients are also more focused on risk management of the short side of the portfolio. Mr. Thomas said investors also are asking whether their strategy is diversified from other quantitatively driven 130/30 strategies.

“People want to know you’re looking for models uncorrelated with the models other people are using,” he said. “Since the third quarter, a lot of people are looking for that.”