Zebra Capital Management LLC has opened its new liquidity return strategy to outside investors and already has received $225 million in commitments, more than doubling the firm's assets under management.
The new strategy is the brainchild of Roger Ibbotson, Zebra's chairman and CEO, and Zhiwu Chen, director of research. It has been in development for two years and now is attracting the attention of institutional investors, consultants and funds of funds, said Gregory S. Teitel, director of sales and marketing.
Because the mandates have not yet been funded, Mr. Teitel said he could not identify the investment consultant and the hedge fund-of-funds shop that will fund their respective $200 million and $25 million commitments in January. In addition, fund tracker Morningstar Inc., Chicago, invested an undisclosed amount of seed capital Nov. 1 in the strategies. Morningstar owns Ibbotson Associates, a consulting firm founded by Mr. Ibbotson.
Founded in 2001, Zebra Capital Management, Milford, Conn., is a quantitative hedge fund shop that managed $170 million as of Dec. 1. But the investment approach will give investors a choice of investing in a long-only or long/short version of what Messrs. Ibbotson and Chen, both finance professors at Yale University, label an earnings-based liquidity strategy.
In a white paper updated in June 2008, the two Zebra Capital executives showed that “liquidity, as measured by stock turnover or trading volume, is an economically significant investment style that is distinct from traditional investment styles such as size, value/growth, and momentum.”
Mr. Teitel explained that putting that conclusion into practice, the Zebra liquid return strategy seeks public equities with strong fundamentals that are experiencing lower liquidity as measured by trading volume, which generally means they are trading at a discount to stocks that are heavily traded.
“These aren't the current glamour stocks that everyone else is flocking into,” Mr. Teitel said. “Most investors will pay more for sexy stories, name brands which drives up pricing, trading volume and hence, liquidity.” Zebra Capital's flagship version of the liquidity return strategy is global and there are four regionally focused variations — U.S., Japan, Europe and U.K. Each approach can be further focused on large- or small-capitalization stocks, as well as in long-only, long/short or 130/30 vehicles.
The annual performance target for each variation is in “the double digits,” Mr. Teitel said, The flagship Zebra Global Liquidity Return fund produced a gross compound annualized return of 12.25% per year in backtesting from Jan. 1, 1996, to Sept. 30, 2009.
