130/30: A “Silly Gimmick” or an “Important New Mandate”?

by: Christopher Holt May 20, 2008    
Christopher Holt

Christopher Holt

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Doug Kass of Seabreeze Investment Management, a veteran short manager and market commentator sure isn’t sold on 130/30.   The manager of $200 million of short positions tells Barron’s this week:

These funds are a silly gimmick and their half-life will be short. Nearly every long/short manager thinks he is equally facile on the short side as the long. Shorting requires a different skill set; you have to have the mindset of an investigative reporter and be a skeptic at the core. Also, many 130-30 funds use exchange-traded funds [ETFs] as a proxy to short. That’s a cop-out and a poor way to produce excess returns.

There’s no question shorting requires “a different skill set.”  But like any skill-set, these skills can be bought and sold by participants in the asset management industry - enabling long/short managers and even (gasp!) long-only managers to rapidly move onto a level playing field with seasoned short-sellers.  Unless you consider some kind of inherent culture that makes for successful shorting, no asset manager can hope to erect barriers to entry in this burgeoning niche.  In our view, it’s just not that fundamentally unique when compared to long-only or long-short.

Long-only managers have been immigrating to the Republic of 130/30 for some time.  Now the republic’s other border (the one it shares with Hedgistan) is also experiencing an increase in traffic.  Italy’s Banca Fideuram handed over a whopping $3 billion mandate to hedge fund behemoth GLG recently.  As HedgeWorld reports this week, the bank says:

GLG has a proven track record of alpha generation capability and our existing relationship gives us great confidence in their ability to manage this important new mandate and create additional value for our investors.

That’s Italian for “It’s all about alpha.”

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This article has 2 comments:

  •  
    May 20 08:45 AM
    The market is a superb gardener - and will ultimately weed-out inefficiencies. If a 130/30 doesn't cut it, it shall not survive- but some will and I imagine some will serve an investors purpose and need. Shorting ETF's a cop out? Is that the same as an inverse long? An qualititative opinion is but an opinion...
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  •  
    May 20 11:51 AM
    Doug Kass is quite a bright guy - I recall communicating with him by email in early 2003 when we were both very bullish. With that said, he is talking his position when he suggests it is a gimmick. I can't tell you how frustrating it was when I was running money for others in a long-only style not being able to fully utilize our research capabilities by taking short positions. I respectfully disagree with Doug, though I do think that it isn't as easy as it appears to be on paper to engage in the strategy.
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