The strategy known as 130/30, whereby a fund takes both long and short positions, can produce strong results but is highly dependent on the skills of the portfolio manager, Dow Jones reports, citing a study by Merrill Lynch.
Factors that have a large bearing on 130/30 strategies’ success include whether the manager uses quantitative or fundamental strategies, how committed he is to his holdings, his benchmark and how many stocks he is underweight.
“Clearly, the analysis shows that almost regardless of a manager’s style, there is a benefit to the increased flexibility which the short-extension, or 130/30 funds, officer,” said Benjamin Bowler, one of the study’s authors and co-head of equity-linked research. “It will be difficult to manage funds in a constrained way going forward because there will be so many managers that are less constrained. Hedge funds are a prime example of that.”
However, critics of 130/30 funds have said that not every long-only manager will adopt readily to shorting, and the Merrill Lynch report agrees.
“The skills, information and implementation required for shorting stocks, or broader risks such as sectors or countries, are very different to those associated with the long-only investment paradigm,” the report said. In fact, quantitative models tend to do a better job of picking stocks for a 130/30 strategy than active management, Merrill said.