Funds using these strategies have started to appear in the retail market as a result of the wider investment powers under Ucits III. These rules enable fund managers to use derivatives to take long and short positions in the same portfolio.
Shorting – where managers borrow overpriced stocks, sell them to generate a cash return, then buy them back at a lower level to return them the to lender – is a strategy commonly used by hedge funds. The fund manager profits from the difference between the high selling price and low buying price, less fees paid to the lender for borrowing the stocks.
However, unlike hedge funds, Ucits III funds are allowed to create short positions only through derivatives. This is known as synthetic shorting and its aim is to achieve potentially higher returns than a long only portfolio.
130/30 strategies usually involve investing in long-only portfolio, selling short 30 per cent of the value of this portfolio in stocks expected to fall in price, then reinvesting the proceeds from the short sales in the long portfolio. Investec’s fund can change the degree of shorting to suit market conditions. It may, for example, adopt a 120/20 strategy – selling short 20 per cent of the portfolio then reinvesting the proceeds into the long portfolio.
The fund will be managed by Investec’s head of 4Factor research James Hand. Hand, who joined Investec in 2000, has 10 year’s investment experience and previously worked as an analyst at Schroders. Hand will apply Investec’s 4Factor investment process to the new fund as the company believes it is particularly suited to a long/short portfolio. It identifies the best and worst stocks in the universe, highlighting which areas to short.
Hand believes managers hands are tied on long only portfolios if they want to significantly underweight a holding He sees going short as a way that managers can act on their views by taking bigger negative positions and points out that short positions can also be used to reinforce positive long positions.
130/30-style investing is new to the UK retail market but Investec believes the combination of its global equities team and its flexibility in relation to the 130/30 limit make it a strong proposition.
However, the success of the fund depends not only on Hand and his team shorting the right stocks, but also finding the appropriate range for this investment strategy as market conditions change.