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Short-selling: Equity investors seek alpha through 130/30

Institutional investors adopt the 130/30 rule.

In their quest to find excess return, institutional investors are increasingly turning to an investment technique that involves taking short positions in equity without straying too far from traditional long-only mandates, say the banks and fund managers that provide access to the strategy.

Variously known as 130/30, active extension or short extension, the strategy relies on relaxing long-only constraints to allow managers to take a specified proportion of short positions, thereby giving them the potential to create return from negative as well as positive views. The 130/30 refers to the fact that the strategy is often put in place with constraints set at 30% short and 130% long, although it could just as easily be 120/20, 140/40, or some other proportion.

“Part of the motivation for this was survival for a lot of long-only money managers as the hedge funds have moved into their space,” says Kevin Alger, head of equity solutions for JPMorgan’s private clients in New York. “The managers are trying to come up with things that are a little more aggressive in their ability to leverage the information advantage that they might have.”

Sea change

Ben Scott, executive director in prime brokerage at Morgan Stanley in New York, adds: “Some of our clients believe that in 10 years all money should be run this way.

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