These top 130/30 managers retained a core of their institutional client base after the market crash and report that interest — and asset inflows — are picking up. They predict a modest renaissance because of investors' willingness to lift constraints and give managers more places to uncover alpha.
The truth of that tale is borne out by the $108.9 billion Teacher Retirement System of Texas, Austin, which added a new $296 million allocation in March to AQR Capital Management LLC's small-cap 130/30 strategy. It already had a $959 million investment in D.E. Shaw Group's flagship 130/30 approach.
Ohio Public Employees' Retirement System, Columbus, started searching for 130/30 managers in 2010 and now has $400 million total managed by four different firms, confirmed Michael Pramik, a spokesman for the $76.4 billion fund, in an e-mail. The firms are The Boston Co., Los Angeles Capital Management & Equity Research Inc., J.P. Morgan Asset Management and AQR, which was hired in March. The size of each manager's mandate could not be learned.
“It's early to make any determinations about the success of the program, but as a group they are outperforming their benchmark this year,” said Mr. Pramik in his e-mail.
Demand for the J.P. Morgan Asset Management Large Cap 130/30 strategy has been so strong that the investment team closed it to new investors three years ago and keeps a waiting list, said Lee Spelman, managing director and head of U.S. equity client portfolios for the New York-based firm. About $17 billion is invested in the large-cap core 130/30 approach.
A strong driver of JPMAM's growth over the past few years has been mutual funds. Retail mutual funds account for 48% of the firm's $18 billion total in 130/30 strategies; institutional separate account and commingled funds comprise the remainder.
Ms. Spelman said the “definite pickup in institutional interest” is in large part “recognition that the environment is tough for active equity managers. You need all the tools you can lay your hands on to create alpha and if you can make money by investing in stocks you like, why not take advantage of being able to bet against those stocks that you don't like?”
While JPMAM offers a fundamental approach, hedge fund specialist D.E. Shaw Group, New York, offers quantitative 130/30 strategies and also is experiencing demand from institutional investors, said Trey Beck, managing director.
Mr. Beck said D.E. Shaw has been involved in 11 searches during the past two years and won six of those contests. Five potential investors and three of the firm's existing long-only institutional clients also are considering a move to the strategy, he said, He declined to identify them.
Mr. Beck stressed that despite the widespread abandonment of the 130/30 model four years ago, “the idea has fundamental value. It's rational to look for equities that outperform, and long-only managers should always be looking for them. But it's in the shorting that managers can look for securities that they believe will go down.
“The problem is that for managers without skill in shorting, 130/30 strategies just give them more rope to hang themselves with.”
D.E. Shaw just released a white paper “130/30 Version 2” on its website that argues the case for 130/30 strategies.
A number of 130/30 managers attributed their firm's decline in assets to the changing investment needs of clients. That was the case with quantitative specialist Jacobs Levy Equity Management, Florham Park, N.J., said Bruce I. Jacobs, principal, in an e-mail.
Mr. Jacobs said about $2 billion of the firm's decline in assets was the result of two clients, which he declined to name, moving their assets to other Jacobs Levy strategies.
“One client was concerned with the stability of their French prime broker and that client decided to convert to our long-only strategy with the same benchmark. The other client for whom we subadvise converted their multimanager funds to defensive equity, and our 130-30 mandates were converted to our Defensive Equity Strategy,” Mr. Jacobs said.
BlackRock, New York, received its stable of quantitatively managed 130/30 strategies from Barclays Global Investors, which it acquired in 2009. Brian Beades, a spokesman for BlackRock, said in an e-mail that the decline of the $9.6 billion of 130/30 strategies that BGI managed as of Sept. 30, 2008, was partially due to recategorization of assets after the acquisition and client redemptions.
In 2007 and 2008, when 130/30 strategies were the big craze in institutional money management, many large money managers with equity management capabilities quickly pulled together an offering, often at the request of an existing client. These managers largely have continued to manage 130/30 mandates for clients that still wanted, but they are not actively seeking new clients.