U.S. money managers have accumulated nearly $30 billion in newly popular 130/30 or similar equity strategies, but no firm has established itself as king of the mountain yet.
The early leaders are State Street Global Advisors, Boston, with $5 billion in such strategies; Jacobs Levy Equity Management, Florham Park, N.J., $4.2 billion; and Barclays Global Investors, San Francisco, managing $2.5 billion in these strategies.
Most of Jacobs Levys assets are in five different 120/20 strategies. State Street and Barclays Global Investors would not release information about their individual strategies.
In these strategies, the firm shorts a certain percentage of the portfolio, but those short positions are balanced with extra long positions so the overall portfolio has full market exposure. A 130/30 strategy goes 130% long and 30% short, for instance, while a 120/20 strategy goes 120% long and 20% short.
Analysts and consultants said the market for these strategies is in such early stages that no one firm dominates.
The penetration of this market changes by the day, said Tom Monroe, a portfolio manager for the domestic large-cap quantitative fund of funds at Russell Investment Group, Tacoma, Wash. Its growing so fast, the pecking order changes all the time.
Prime brokers that handle accounts for institutional investors engaging in 130/30 or 120/20 strategies estimate as much as $60 billion is already invested in them. That figure includes strategies from U.S. and international management firms and as well as money that pension funds have allocated but not yet invested, said Sarah Barratt Ball, executive director for Morgan Stanley Prime Brokerage, New York.
Experts said that so far, most of the money comes from converting existing portfolios, typically active U.S. large-cap or U.S. enhanced indexed equity accounts.
Theres still not a lot of managers to choose from, said Florian Weber, a research analyst in the manager research group at Wilshire Associates, Santa Monica, Calif. If they like their current manager, they buy into them; its easy to just give them the ability to put shorts in the portfolio.
Russ Kamp, the chief executive officer of the global structured products group at INVESCOs New York office, estimates 20% of the money invested in U.S. large-cap core long-only strategies will move to short-enabled strategies during the next decade.
Managers stand to make substantially higher fees from 130/30 strategies. While a manager might charge 50 to 80 basis points for a typical active U.S. large-cap strategy or 30 to 50 basis points for an enhanced U.S. index strategy, a 130/30 account might generate fees as high as 60 to 100 basis points, Mr. Weber said.
CalPERS leads the way
Large pension funds are just starting to invest in these strategies. The $235.5 billion California Public Employees Retirement System, Sacramento, placed Analytic Investors Inc., First Quadrant, Goldman Sachs Asset Management LP, Quantitative Management Associates LLC and SSgA on a pre-approved list to run 130/30 and 120/20 strategies. As of deadline, CalPERS had not given money to those managers.
The $28 billion Public School Retirement System of Missouri, Jefferson City, has more than $500 million invested in 130/30-type mandates with Aronson + Johnson + Ortiz LP, Martingale Asset Management LP, Analytic and AQR Capital Management LLC.
There is evidence that a lot more pension funds are warming up to 130/30 strategies. JPMorgan Asset Management, New York, recently hosted a webcast for clients and consultants on the issue, with more than 300 participants logging in.
Its a better way to run money and it will become a large and accepted part of the money management scene in the next five to 10 years, said Paul Quinsee, chief investment officer of the core U.S. equity group that manages JPMorgans 130/30 strategies.
Managers keep rolling out 130/30 or 120/20 products, which also are known as active extension or short-enabled strategies. Recent entrants include Northern Trust Global Investments and New York Life Investment Management.
Wilshire Consulting has a list of roughly 75 or 80 active extension strategies. Only about a third of these strategies have a track record with money in the product, Mr. Weber said. And only one strategy has a track record dating before 2004.
Quant managers dominate
In the early going, quantitative managers have won about 80% of the mandates for active extension strategies, estimates Ms. Barratt-Ball of Morgan Stanley.
Quantitative managers have the easy story, said Jay Love, a principal and senior consultant for Mercer Investment Consultings Atlanta office. Its easy for them to sell by saying its the same model (for choosing securities), we just turn on the shorts.
For a fundamental manager to be successful, the firm needs to show it has a history of ranking every security in a universe of potential stocks, not just those it wants to invest in long-term, Mr. Love said.
JPMorgan is one of the main fundamental managers winning 130/30 mandates, running a total of $1.5 billion in two different strategies.
Mr. Quinsee said JPMorgan succeeds in selling its 130/30 strategy because the team has prior experience in shorting by running a market-neutral strategy along with the groups long-only strategies.
The lack of knowledge about these products and the lack of long track records are about the only things that have slowed their growth. With short track records, people want to be very careful that theyre picking the right ones, said Paul von Steenburg, a consultant and vice president for Wilshire Consulting.
As more plans get familiar with the strategies and start investing, top-performing managers will have to differentiate themselves by showing they do a better job of cutting back transaction costs, Mr. von Steenburg said. Those costs eat away the alpha.