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Capital Markets

Long/Short investing: Quant funds take shine off 130/30 performance

Many have struggled to beat regular equity market returns, especially after liquidity crisis, says research.

The much-hyped constrained version of equity long/short investing called 130/30 has failed to meet investors’ expectations of returns thanks to the widespread adoption of the strategy by purely quantitative asset managers earlier this year; subsequently many of these managers performed poorly during the summer’s liquidity crisis.

A number of 130/30 funds have launched since the end of 2006, when there was a lot of speculation that institutional investors were ready to place vast amounts of money into the strategy. However, performance analysis conducted by independent investment research company Morningstar suggests that many of the nascent funds have struggled to beat regular equity market returns. Observing the year-to-date returns of 38 mainly US-based 130/30-type investment vehicles at the end of August, Morningstar reported an average return of just 3.9% among the funds. The S&P 500 returned 5.2% over the same period.

"Most of the quantitative 130/30 funds did very poorly during the liquidity crisis," says Scott Bondurant, global head of long/short investments at UBS Global Asset Management in Chicago.

Funds using 130/30 strategies aim to create market-beating alpha returns on top of regular beta market returns by implementing the kind of long/short strategy usually associated with hedge funds but in a strictly constrained way.

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