There is still room in the pool for more managers to jump in, consultants say.
“It’s not like indexing, where it all comes down to having economies of scale,” said Chris Meyer, a managing principal and chief investment officer at investment consultant Fund Evaluation Group, Cincinnati. “If we continue to see assets flow in, you’ll just see more managers offer products.”
In the six months ended Sept. 30, searches for 130/30 and 120/20 strategies outpaced those for hedge funds, hedge funds of funds and most other alternative strategies, said Keith Black, associate for the opportunistic strategies group at Ennis Knupp & Associates, Chicago.
“The majority of searches in the last six months have been for 130/30 and (specialized) fixed-income products,” he said.
Most of the assets in 130/30 strategies (also known as short extension or active extension), are held by quantitative managers, though Mr. Black said fundamental managers are starting to make some inroads as well.
P&I’s survey total is lower than some other industry tallies, which put the amount invested in 130/30 strategies at up to $75 billion. One reason is that the $17 billion Renaissance Institutional Equities Fund was not included because the fund, which uses a 175/75 strategy, has a beta of 0.4, according to sources familiar with the fund. Typically, active-extension strategies have a beta of 1, giving them full equity market exposure.
Another factor is that some other surveys count strategic allocations made by pension funds and other institutions that have not yet been awarded to individual managers. P&I’s survey counts only those assets actually run by 130/30 managers.
Sarah Barratt Ball, executive director of Morgan Stanley Prime Brokerage, New York, said it’s not surprising that many of the largest active-extension managers are household names. “Pension funds are learning about the product from the managers,” she said. “The ones who can distribute that thought process to the pension funds are the ones who have the large distribution channels.”
Fundamental firms grow
The August market drop helped fundamental strategies get more attention.
Many quantitative models sufferedin August and, as a result, many money managers using those models experienced poor returns in their 130/30, market-neutral and long/short strategies. The drop did not cause clients to terminate 130/30 mandates with quantitative managers, Mr. Black said, but it helped validate managers with fundamental 130/30 strategies.
The two largest managers of fundamental strategies have had significant growth in 2007. Active-extension assets run by JPMorgan Asset Management, New York, more than doubled to $3.3 billion by Sept. 30 from $1.5 billion at the end of the first quarter. Most of the money is run in fundamental active extension strategies, but $28 million is in quantitative 130/30.
Fundamental managerUBS Asset Management, New York, had $2.3 billion in active-extension assets as of Sept. 30, up $1 billion from the start of 2007.
“We’ve seen a dramatic change in where the growth is coming from,” said Paul Quinsee, chief investment officer of core equity for JPMorgan Asset Management.
From 2004 to 2006, nearly all money moving into JPMorgan’s active-extension strategy was from clients with traditional long-only strategies run by the firm converting to the new vehicles. In 2007, nearly half has come from new clients, not conversions of existing portfolios, he estimated. A three-year track record and growingacceptance of 130/30s drew new clients to JPMorgan, he said.
Officials at SSgA, the largest manager of active-extension strategies, with $11.7 billion also are seeing new business coming from new clients. Ric Thomas, managing director and head of SSgA’s North American enhanced equities group, estimates that 30% to 40% of SSgA’s active-extension assets come from new clients this year and last.
While the vast majority of 130/30 assets come from defined benefit plans, Mr. Thomas said endowments and foundations are starting to take notice. A dozen endowment or foundation clients have hired SSgA for active-extension portfolios in the past year; he wouldn’t name any.
Remaining questions
As more tax-exempt institutional investors take a look at 130/30 strategies, managers and consultants said questions tend to center on the shorting aspects of the active extension strategy.
“Clients are familiar with the long side. It’s the short side they’re trying to get their arms around,” said Shelly Heier, a consultant at Wurts & Associates, Seattle. Clients want to know how the manager is improving the portfolio by shorting certain stocks, she said.
JPMorgan executives said clients are also more focused on risk management of the short side of the portfolio. SSgA’s Mr. Thomas said investors also are asking whether their strategy is diversified from other quantitatively driven 130/30 strategies.
“People want to know you’re looking for models uncorrelated with the models other people are using,” Mr. Thomas said. “Since the third quarter, a lot of people are looking for that.”
