Alpha - September 2007 - (Page 64)

13030 Higher-risk versions of the 130/30 genre are 170/70 or even 180/80 long-short, which could play to hedge funds’ strengths is natural,” says Paul Calderone, director of equities prime services at Credit Suisse. Certainly, as beta-one products, these funds aren’t much competition for absolute-return funds. On the other hand, plenty of hedge funds offer a 130/30 product themselves or are incubating one, anxious to cash in on the increasing volume of assets flowing in this direction. Some are making a serious commitment to it. Maverick Capital, for example, was in the top 20 managers of 130/30 products, in assets under management as of the end of March. As a result, some market commentators see the popularity of 130/30 funds among managers of hedge funds and long-only funds alike as further evidence that the gap between the two is continuing to shrink. Merrill Lynch thinks the volume that the 130/30 market will attract is a compelling enough reason for more hedge Paul Calderone funds to get involved. "There is Credit Suisse approximately $3 trillion in long-only equity in US pension plans and $6 trillion in long-only equity in mutual funds,” says Charlie Shaffer, managing director and head of the 130/30 group at Merrill Lynch. “If you assume that 10 percent to 20 percent of these longonly assets are unconstrained, we think $1 trillion in 130/30 funds could end up being a conservative assumption. Of course, it will depend on performance, but the potential is definitely there." Because 130/30 funds fall under plan sponsors’ equity allocations, rather than the far-smaller category of alternative investments, some think it makes sense for hedge fund managers to offer 130/30 funds, which charge lower fees but represent a much higher-volume business. ”Fees will often be compressed compared with their flagship absolute-return funds, but 130/30 offers the opportunity both to diversify their client base and to provide access to a much larger pool of assets," says Michael Kilgallen, co-head of the 130/30 team at Citigroup. Ratcheting Up Risk Shaffer says Merrill Lynch is doing a lot of work with hedge fund clients to determine what the 130/30 opportunity is and how to take advantage of it, particularly those long-short or relative value funds that already focus on large-cap equities. "We know of a successful US hedge fund that has a 170/70 strategy that is looking at spinning a 130/30 product off of that model specifically to attract converted long-only assets,” he says. “Ultimately, we believe a good number of successful hedge fund managers will be willing to lower their fees to expand and diversify their business." While 130/30 is the generic name for the product, higher-risk versions are 170/70 or even 180/80 longshort, which could play to hedge funds’ strengths. “In the long run, if pension plans and endowments actually become more comfortable with shorting, this may open up new opportunities and be a bridge to more aggressive strategies that hedge funds can profit from,” says Ric Thomas, senior managing director and head of North American enhanced equity at State Street Global Advisors. “More aggressive managers have much wider ratios, such WHAT IS A 130/30 FUND? Otherwise known as a short enabled or short extension fund, a 130/30 fund allows long-only managers to generate greater returns by shorting a portion of their portfolio, thus enabling them to express both positive and negative opinions on stocks. A hybrid that brings together long-only and long-short techniques, the typical strategy combines 100 percent long exposure to a list of stocks, with 30 percent short selling and another 30 percent added to long exposure from investing the proceeds of shorting. Although 130/30 is the generic name for the product, managers are now offering strategies ranging from 110/10 to 180/80 long and short. 2 • Alpha Sponsored Report • September 2007

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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