Expect an increase in the number of 13030 portfolios
We are expecting a wave of asset managers to begin offering 13030 portfolios this year, as the gap between traditional managers and hedge funds continues to narrow.13030 the best of both worlds?
13030 can be seen as an attempt to take the best from both worlds. It is a combination of a 100% long exposure, 30% of short selling and an added 30% of long exposure coming from investing the proceeds of shorting. It is a beta one product, as it is 100% net long, but it allows the manager to add symmetrical long and short positions as well, and increases the proportion of stock-specific risk, rather than market risk. In addition, the 13030 portfolio would also give the fund manager freedom to implement high conviction long and short ideas with equal force. Theoreticians argue that they also produce alpha more efficiently.More precise risk control
Relaxing the ban on shorting allows managers more fine-grained risk control. It may well be that a fundamentally driven long portfolio will bring with it a set of industry-specific risks, for instance. A manager could use shorting to neutralise these. Equally, managers could find themselves taking a market-cap risk they do not want. The ability to undertake modest shorting could provide a means to deal with this, as well.About $50bn in assets so far, but growing rapidly
Pensions have been early consumers of 13030 strategies, responsible for most of the estimated $50bn invested in 13030s. Quant managers at larger US firms have been early providers, in many cases, in part because their stock-ranking strategies lend themselves to shorting. But fundamental managers and hedge funds are increasingly offering or considering the portfolios.Evolution is positive, but some potential risks
The proliferation of 13030 portfolios is a positive, in our view, in that they add to the repertoire of traditional managers and should produce greater flexibility and innovation. Fees are attractive, as the format emphasises asset manager skill. On the downside, we expect 13030 portfolios could add risk control and compliance costs, and a flood of introductions could prevent some from gaining scale or increase pressure on fees.Why 13030 as opposed to 300200?
We think that there are some sensible, pragmatic reasons why 13030 has become a widely accepted yardstick. If shorting is harder from a liquidity perspective than going long, it makes sense to choose a preponderance of long investments. If short ideas are harder to come by than long ones, the same argument applies. In terms of market positioning, there is something to be said for an approach that can be seen as long plus rather than hedge minus. 300200, we think, would very readily be seen as an aggressively leveraged long/short fund with a long bias. In reality, just as long-only funds tend to hang onto some cash, we doubt if there will be much noticeable difference between a 13030 fund, a 12525 fund or a 13535 fund.Trends in asset management
In some domiciles, such as European retail, there are regulatory reasons why 13030 has moved up the agenda recently. UCITS III is a major boost here. In many areas, though, its emergence is more a reflection of broader industry trends.We have recently produced an overview of the European asset management industry and a few highlights from the report help to illustrate industry developments.
Benefits to asset managers
We believe there are considerable benefits to the asset management industry in adopting more advanced hedge fund-like strategies in Europe. These include:- Increased margin: A greater allocation to alternatives has led to an increased revenue overall.
- Increased ability to retain/recruit staff: Hedge funds have been talent magnets for the past few years. Mainstream managers' ability to offer more hedge fund-like strategies is therefore a key potential weapon for recruiting staff.
- De-beta-ing performance: In our view, it is positive for quality of earnings for a manager to be exposed to a number of factors of performance, rather than predominantly beta. More alternative-like strategies achieve this.
Drawbacks
Every silver lining has a cloud. Here are a few:- Systems costs: Moving away from long-only investing requires more sophisticated systems, with a much heightened stress on risk measurement. In some formats, this is a regulatory requirement. Elsewhere, it is simply sound business practise.
- Long-only managers not encouraged to find short ideas: There is a good incentive to take a strong positive view on even a relatively lowly weighted stock, as material active position can be taken here. There is next to no incentive to decide if a lowly weighted stock is anywhere on the continuum between mediocre and destined for Chapter 11.
- Finding alpha: In our view, this is the greatest challenge. Alpha is, even on an optimistic view, a zero-sum game in any individual asset class.
