Money managers are adding shorting capability to long-only equity strategies, in what might turn into one of the hottest investment categories in years.
Some experts think such approaches could take a hefty chunk of money away from traditional active equities.
These long-short approaches predominantly go long, frequently 130% long and 30% short. They differ from market-neutral approaches, which sometimes are referred to as long-short, but actually have equal long and short positions. They also differ from hedge-fund-type long-short strategies that, generally, don't adhere to such tight guidelines.
Managers said institutional clients are champing at the bit to learn about the strategies. "I've made 10 presentations in the last four weeks on this. Most of those have been calls from people asking to hear about the idea," said William Jacques, chief investment officer of Martingale Asset Management LP, Boston, which runs more than $300 million in such strategies.
A memo by the staff of the $193.3 billion California Public Employees' Retirement System, Sacramento, gave a ringing endorsement to the concept.
"Allowing a manager to go long or short to equally express both their bullish or bearish views on a security allows for more consistent returns, high information ratios and the ability to maximize the value of their investment insights," the memo said.
Brad Pacheco, a CalPERS spokesman, said the fund could invest billions of dollars in the strategies, mostly drawn from passive equity portfolios but also possibly from underperforming active managers. The CalPERS investment committee will discuss the concept at its Nov. 14 meeting. If it's endorsed, staff will draft an RFP for both domestic and international long-short managers.
"I think this will be a big innovation, just as enhanced indexing was in the 1980s," said Paul Quinsee, chief investment officer of JPMorgan Asset Management's U.S. equity team in New York.
JPMorgan gained its first account in June 2004. Today, the firm runs about $200 million in such strategies, and is in "quite a lot of advanced conversations to increase that significantly," Mr. Quinsee said.
Robert Litterman, head of quantitative resources at Goldman Sachs Asset Management, New York, said the long-short approach "really makes sense in fixed income and currencies as well." GSAM has been pitching long-short strategies around the world; its first institutional account was funded on July 15.
State Street Global Advisors, Boston, appears to be the leader, running nearly $2 billion in long-short approaches for clients around the world. About 25% of that is for U.S. institutions, mostly in a U.S. equity strategy that is 100% long and 30% short, giving it a 70% market exposure, said Arlene Rockefeller, senior portfolio manager and head of global active equity at SSgA. Foreign investors have opted more for a 130/30 approach, she said.
Other managers marketing long-short strategies include Barclays Global Investors, San Francisco; Analytic Investors Inc., Los Angeles; and Aronson + Johnson + Ortiz LP, Philadelphia.