Offshore mutual 130/30 funds performance over last eight months
130/30 funds, or active extension funds, have grown out of the belief that traditional long-only fund managers can enhance the returns they earn on their portfolios by actively selling some shares short.
The manager of an active extension fund simultaneously takes both long and short positions on different equities in the fund (a long-short equity fund).
Although long-short investments have existed for a while in the hedge fund industry, they are relatively new for retail investors.
According to Jeremy Hall, the active extension concept can, if properly harnessed, offer investors a powerful alternative to long-only funds in both bull and bear market conditions.
"The 130/30 or active extension concept is flexible enough to generate additional positive performance in a rising market and outperformance in a falling market. Active extension funds are not hedge funds or absolute return products, but their ability to short stocks does offer an extra source of outperformance in turbulent markets.
"These strategies offer a major advantage over traditional long-only funds; they permit the manager to sell 30% of the fund’s assets short and reinvest the proceeds in an additional 30% of long positions to generate outperformance. Maximising this advantage, however, depends on the ability of the manager to generate alpha from both the short and long book."
However, the shorting strategy cannot be easily implemented as fund managers face many challenges while transitioning to the 130/30 strategy. For instance, not many custodians have the infrastructure and technology support necessary for shorting. Their legacy systems have to be compatible with the current and future needs of the 130/30 strategy.
Hall argues that Cartesian’s proven long/short process is a major advantage for the fund:
“Our investment process is plain vanilla and has not been adapted to fit this fund – our process already suited 130/30 very well," he says.
"Active extension strategies are not new to Cartesian as we have run similar funds before as a team. To make the most of 130/30 you need to be able to generate alpha from both your long and short books and we have a proven record of doing that. Our experience and process has been a key contributor to our strong relative performance and differentiates us from our peers."
Although 130/30 funds are often criticised for being riskier than their long-only counterparts, Hall says that, in practice, a good fund manager will be able to mitigate most, if not all, of any additional risk.
"If the manager is skilled at stock selection and portfolio construction any incremental risk borne by the investor should be compensated for by additional excess return. It is also important to remember that the 30% of extra long positions is offset by the 30% sold short, so a 130/30 or active extension portfolio will have a 100% net exposure to the market and will, therefore, have a similar market risk as an equivalent long-only fund."
Hall believes active extension funds should appeal to most types of investors.
"Active extension funds offer the kind of flexibility long-only funds simply cannot match. Active extension strategies, as proven by Cartesian, can add considerable alpha in all market environments, making them credible additions to any well diversified portfolio. As advisers and investors realise the ability and potential of active extension funds, their appeal will spread beyond the institutional market place where they are well understood. Whilst this will take time we believe they will become commonplace in retail portfolios in the near future."
130/30 funds have not received much coverage lately but according to Deutsche Bank’s latest annual alternative investment survey 14 per cent of investors said they invested in or "will consider" 130/30 funds. .