130/30 funds feel the pinch after regulator’s ban
While many hedge funds have argued against regulatory bans on shorting financial stocks, 130/30 funds – which have seen particularly high growth in the past two years – are also feeling the impact.
A 130/30 fund invests its assets according to a long-only strategy and supplements the investments by shorting stocks to raise another 30% of assets to invest on a long-only basis. Such strategies invest 130% of their assets long and 30% short.
Now, after months of difficult equities markets, the structures face an additional challenge. Two weeks ago, both the US and UK regulators banned fresh shorting of shares of some financial services companies and adding to existing short positions, and other regulators around the world have followed suit.
Market participants are waiting to see what impact it has on the strategy that has only recently come to the fore.
Damien Loveday, a manager researcher at investment consultant Watson Wyatt, said the impact of the restrictions on any fund, including 130/30 funds, depends on their investment strategy.
Loveday said there were two basic uses for the shorting element in 130/30 funds: they either use the shorting element to generate returns from specific stocks or they use them to hedge long exposures. In either case, like other long/short funds, they will only be able to build long positions in financials stocks.
Loveday said: “Unless 130/30 funds want a large bet long on financials, they might have to sell their long positions. It diminishes the ability of 130/30 funds to add value on their short positions.”
Several such strategies are now available in the UK, with UBS, Threadneedle and JP Morgan Asset Management all offering portfolios to investors.
However, the portfolios have faced criticism from some investors and consultants, who question the need for a structure that lies halfway between traditional long-only portfolios and hedge funds.
As many portfolios lack a one-year performance history, others are waiting before they decide whether to make use of the structure.
Jeremy Hall, a partner at Cartesian Capital – a boutique backed by Resolution that offers a 130/30 strategy – said the shorting ban would not lead to cuts in long positions in his company, as it uses both long and short positions to reflect its attitude to stocks, rather than to offset positions.
He said: “The direct impact is that the opportunity set is slightly restricted. The indirect impact is that some funds will have to restructure their portfolios, which could lead to a technically driven market, as share price movements are not down to fundamentals.”
Managers at UBS, Threadneedle and JP Morgan were unavailable for comment.
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