Putting 30 into 130

Following the introduction of UCITS III, alternative investment strategies are increasingly available to mainstream retail managers. 130/30 funds are a good example of this, aiming to capitalise on fund manager skill to deliver greater alpha. Are they just another fad, or a means for fund managers to deliver better, more consistent, risk-adjusted returns to clients?

130/30 funds had their genesis in the US institutional market, which now has over $30bn in these strategies. Unsurprisingly it is asset managers with that expertise, like UBS, who look set to bring these products to UK retail investors. That said, more traditional retail names like Resolution are also entering the arena.

What are they? These funds operate as a long/short hedge fund, but with predefined limits. The fund manager uses a 30% short position to buy additional long exposure of 30%, meaning he is 100% long of the market overall, as a traditional mutual fund would be. The fund manager is extending his bets. Not only can he take larger positions in stocks he believes will do well, he can also profit from those stocks he believes will do badly.

Many fund managers will be able to run this from their existing processes. Donna Wilson, head of the U.S. client portfolio management team for Invesco’s Global Structured Products Group, says: "This leverages manager skill in terms of forecasting the alpha of each stock and the ability to construct portfolios. We use our traditional stock selection model." She adds that while the group runs a number of mandates at 110/10, 120/20 up to 150/50, it is at 130/30 that they have found the maximum pick-up in alpha. After that it starts to fade out.

These strategies are also starting to appear in the portfolios of UK multi-managers. John Husselbee, chief executive of North Investment Partners, holds two of these funds - from Goldman Sachs and Rab Capital - in his portfolios. He says: "It has always been thought that a halfway house would develop between hedge funds and mainstream mutual funds. This is the first evidence of this concept coming together."

Husselbee says that while it does depend more on manager skill, in the right hands it can help capital preservation and reduce volatility. He adds: "It is no different to long-only managers going and running hedge funds, some can and some can''t. The fund selector has to decide whether the manager has the appropriate skillset to be successful. The tool bag is broader than before."

Are they appropriate for the retail market? The regulators clearly think they are right for a UCITS III passport. The risk is that bad fund managers can do more damage, but in the right hands, risk-adjusted performance should improve. They should also be more cost effective than previous attempts to bring alternative products into the retail sphere, like fund of hedge funds. Again, it is a case of fund buyers selecting their managers with care.