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Weight adds cred in the hot 120/20­­­­ market

Barclays Global Investors created the first index strategy in 1971, pioneered the first quantitative active equity fund in 1978 and has long dominated the market in index tracking, more recently through its iShares exchange traded fund products. Caroline Allen examines how the firm is now moving to secure the middle ground of the risk spectrum, developing its range of so-called 120/20 or partial shorting 130/30 funds.

This article appears courtesy of Global Investor.

The trigger for  interest, according to Michael O'Brien, head of BGI's European institutional business, is the growing understanding among investors of how better to exploit manager skill in the search for alpha. That insight has already benefited the hedge fund community, but acceptance is now spreading among institutional investors.

"People are realising that you have to make the return portfolio work harder and embrace techniques that you may not have employed in the past," says O'Brien. "BGI is a quantitative asset manager and our home territory is to separate alpha (manager skill) and beta (market index return), so the partial shorting structure is both familiar and preferred for us to develop."

The range runs from 110/110 to 185/85 and is specific to the market in question, but there is convergence around 130/30. The first partial shorting mandate in the UK was awarded only last year but the structure is coming up more and more often in institutional searches. Dutch pension funds are already actively engaged in a sector estimated to be worth some $50 billion already.

The partial shorting or 120/20 structure incorporates  the use of two techniques, shorting and leverage.

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