State Street Global Advisors' 130/30 assets plunged 47% in the six-month period ended Sept. 30, causing the market leader to fall to fourth place in Pensions & Investments' semi-annual rankings of these long/short strategies.
JPMorgan Asset Management jumped to the top place, with its 130/30 assets surging 30.8% to $11.3 billion from $8.6 billion during the six months. New York-based JPMorgan — a fundamental manager in an area dominated by quantitative shops — also leapfrogged Barclays Global Investors, San Francisco, which remained in second place with $9.6 billion in 130/30 assets, up 3%. Acadian Asset Management LLC, Boston, rose to third from eighth with $5.2 billion in these strategies, up 91%.
Overall, assets in 130/30 — also known as “active extension” — declined 18.4% to $54.1 billion during the period, down from a 22% growth rate during the previous half-year period. The reasons: volatile markets, shorting restrictions and increased shorting costs. Over the year ended Sept. 30, however, 130/30 assets increased by 13.5%.
A number of managers failed to report tallies this time. That group — including Goldman Sachs Asset Management, New York — collectively ran $6.5 billion in these strategies as of March 31. If the $6.5 billion in 130/30 assets were added to the total, the decline for the six-month period would have been only 8.5%
Boston-based SSgA's 130/30 assets fell to $4.8 billion from $9.1 billion during this period — a precipitous drop of $7.6 billion in assets under management.
“The market movement had a bigger impact on our asset losses than client outflows,” said Arlene M. Rockefeller, executive vice president and global equities chief investment officer of SSgA, “since most of our investment is outside of the U.S.”
Managers agreed that 130/30 strategies' previously phenomenal growth rates — they grew 77% in the six-month period ended Sept. 30, 2007 — are in the past.
In a new survey conducted by Morningstar Inc., Chicago, neither institutional investors nor advisers are planning to add 130/30 strategies in 2009, “but constrained shorting is not over yet,” according to Steve Deutsch, director of separate accounts business for Morningstar.
Gina Moore, a principal and portfolio manager at Aronson + Johnson + Ortiz LP, Philadelphia, said it's not an ideal time for clients to invest in active-extension strategies because they were designed in a low-volatility period. Instead, investors are looking for more uncorrelated investment tools, such as more pure market-neutral strategies and private equities, according to Harindra de Silva, president of Analytic Investors Inc., Los Angeles.
In early January, New York-based Merrill Lynch & Co.'s research department projected the 130/30 industry will hit $1 trillion by 2011. Now, managers and consultants think that was an overly optimistic forecast. Theodore L. Disabato, principal at investment consultant Disabato Advisers, Chicago, said he believes investors had higher expectations for 130/30 when it first came out because they had some misconceptions about the strategy.
“People expected lower variability and higher rates of returns in 130/30,” he said. “What 130/30 really is, is a leveraged approach to a manager's added value on the long and short side.” He added the execution of 130/30 hasn't been as strong across the board as expected and consequently alienated investors.
Ms. Rockefeller said even though clients haven't withdrawn their investments in 130/30, it's very difficult to build new business. “Clients seem to be avoiding risks, rather than embracing them in many asset classes,” she said. “130/30 is just one of them.” She added when the market is down, investors are more comfortable with government-guaranteed assets, rather than corporate-backed ones.
On the other hand, Paul Quinsee, JPMorgan's CIO of U.S. large-cap core equity, attributed the dramatic growth for the firm's 130/30 strategies to a fundamental approach and relatively long track record. JPMorgan launched its first 130/30 porfolio in June 2004.
Nevertheless, JPMorgan's growth rate has also slowed recently, he said. “We are very mindful of becoming too big too quickly,” said Mr. Quinsee.
Active-extension strategies also were hurt by restrictions on shorting and by rising shorting costs — up 25% or more. Globally, many countries put on shorting bans one after another, from the U.S. to the U.K. to Australia, which made the logistics of managing 130/30 more complex.
“Once you have a shorting exposure, it's very difficult to work around it,” said SSgA's Ms. Rockefeller. She added that swaps can be used instead of shorts, but that involves complicated retooling processes.
Managers like UBS Global Asset Management, Chicago, which have longer holding periods, were less affected by the shorting bans. “We don't have as high a turnover rate as some quantitative strategies might have,” said Scott Bondurant, managing director and global head of long/short equity strategies. He noted, however, that the shorting ban in Australia postponed the launch of an Australian 130/30 strategy to January 2009 from Oct. 1.