130/30 Hedge Funds … Sound Strategy or Hype?

September 20, 2007 |

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Gotta Love the Marketing Guys.

It seems 130/30 funds are all the rage these days.  The concept is pretty straight forward - a long short equity fund with 130% long exposure and 30% short exposure.  It’s really tailor made for institutions in that the 130/30 part is a guideline that plan sponsors and their consultants can monitor, and beat up their managers should they diverge from that guideline. 

A very clever marketing tool to say the least, but a chicken shit investment style at the end of the day. 

Is this really a “hedge fund” or closet long and short indexing with fancy hedge fund fees?  We will know the answer to that as soon as we have enough monthly data points to run a few regressions.

There are plenty of studies to show that indexing is the way to go versus active management on the traditional long-only side of the investment spectrum.  Take a look at the average 30% exposure of the short books of these 130/30 funds versus the inverse of the S&P 500, and my guess is that you will find the same results. 

Now, of course, try to do the same analysis on true “hedge funds” and the conclusions are much different.  First, how do you define a passive investment for most hedge fund strategies?  An investable hedge fund index that doesn’t even come close to representing the true universe of hedge funds?  Lots of folks do it, and shame on the average allocator that can’t beat those benchmarks. 

Sorry, I’m a bit of topic here.

What I’m trying to get at is that we should be paying our long/short managers to be active exposure managers.  If the macro environment looks dismal, I would hope that my manager is trimming his exposure to 90/40.  If the market is on fire, let’s see him go to 150/10. 

We’re paying big fees for this stuff folks; let’s make sure our managers are earning it!  I’m sure Gordon Gekko will be running a 130/30 fund in the sequel.
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