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Long look at short concept

“Short extension” strategies, or 130/30 funds, are a relatively new concept for the British investment market. They have existed in America for the last few years, with groups such as State Street, Mellon and Barclays Global Investors cited as the main players.

Initially, 130/30 strategies were used for institutional investment only and were quantitative in style. Gradually, however, they have spread into the retail market and are attracting fundamental managers.

With the added flexibility allowed by Ucits III, many argue they will take off in Britain. The introduction of Ucits III has enabled managers and fund groups to use a much wider range of instruments and structures. This year will see a number of groups launching 130/30 funds in Britain. They include UBS, F&C, Cartesian, Fortis Investments and JP Morgan (JPM). JPM launches its US 130/30 fund this week and will launch its Euro select 130/30 later this month. What do the Adviser Fund Index panellists think of 130/30 funds? And will they invest in them?

A 130/30 fund uses a hybrid of long-only and long/short positions. It retains market neutrality by reinvesting the proceeds from its short positions into long only investment. Any short positions taken are matched by adding long positions, ensuring the fund is 100 per cent net long. So if 30 per cent is shorted, 130 per cent is long.

Ben Willis, head of research at Whitechurch Securities, however, says he is “not 100 per cent convinced” by the concept. As with other AFI panellists, he says he needs to do more research.

“It is definitely an area we will look into,” he says. “We need to do more research. They are a blend between hedge funds and long-only funds. It could be the next big investment theme in the market.” Willis adds that if he does use 130/30 funds in his AFI portfolios he would initially position them in the cautious and balanced indices.

Jonathan Wallis, head of retail fund research at the Allenbridge Group, also wants to look at the strategy in more detail. “I am wary of any fund that is a new structure like this,” he says. “The theory sounds great but it depends on the individual fund. They could be used to reduce risk or gear up risk. At the moment, most seem to be aiming to reduce it.”

Charles Stanley investment manager Shauna Bevan says innovation is welcome. “We would look at any strategy that we think is appropriate,” she says.

Overall, the view is that 130/30 funds are welcome but panellists need to know more about the individual mandates and see how they perform.


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