FLORHAM PARK, N.J. — A new active equity management approach is being touted by advocates as offering a better chance to outperform benchmark indexes and achieve hedge fund-like alpha without transparency or fee issues while keeping the risk level of a traditional portfolio.
A growing number of investments firms have begun offering the approach — mostly called a 120/20 or 130/30 strategy — to pension funds in the last year.
Jacobs Levy Equity Management Inc., Florham Park, N.J., already has received $3.7 billion in investments and commitments from pension funds this year since it began offering its 120/20 strategy, said Bruce I. Jacobs, principal.
UBS Global Asset Management, Chicago, has $300 million in its version, a 130/30 strategy, since it began in September, said Scott Bondurant, executive director-head of long/short products.
In the past year, Barclays Global Investors, Goldman Sachs Asset Management, INVESCO, JPMorgan Asset Management and State Street Global Advisors also began offering 120/20, 130/30 or similar strategies (Pensions & Investments, Sept. 5, 2005).
The strategy overcomes a disadvantage that traditional active equity managers have in trying to outperform benchmarks like the Standard & Poor's 500 or the Russell 3000 because they cannot underweight securities they expect to underperform enough to achieve significant results.
Because only about 15 stocks in the Standard & Poor's 500, the Russell 1000 or the Russell 3000 have an index weight greater than 1%, traditional long-only active equity managers can underweight only these 15 or so stocks by one percentage point or more, Mr. Jacobs and Kenneth N. Levy, also a principal of the firm, write a forthcoming article in the Journal of Portfolio Management.
"Fully half the stocks in the S&P 500 have an index weight below 0.1%; half the stocks in the Russell 1000 have an index weight below 0.03%; and half the stocks in the Russell 3000 have an index weight below 0.01%," they noted. "The investor's ability to benefit from a negative view about a stock is very limited if the stock can be underweighted by only 0.10 or 0.01."