Bad timing exposes vagaries of market

“130/30 funds are typical bull market funds.” So said one IFA last year as every British fund management group with some kind of shorting experience seemed to be launching the latest concept.

This prophetic statement was made just weeks before the bear market started in August last year, at which point global stockmarkets were swamped with the subprime problems that have stayed with us until today.

Seen as sexy with their new investment powers, the promise was of a fund that could “extend alpha”. In short generate a return that the traditional, unsexy, long-only fund could not. However, according to Frances Hughes’ cover story this week (see page 22) the returns have yet to match up the claims. Despite their ability to short stocks, not one fund has managed a positive return this year.

Perhaps the concept, which on paper makes sense, will work in the long run but the timings of the launches could not have been worse. In fact it takes you back to the last technology fund launches just before the sector went into freefall in 2001. The losses are nowhere near as bad but the idea of launching a fund that seems most suited to bull markets just when the bull market ends has a similar feel.

When the next bull market comes is anyone’s guess. Perhaps America’s Federal Reserve read Daniel Ben-Ami’s comment last week (Pragmatism chokes principled policies) when it decided not to bail out Lehman Brothers as it had previously done with Bear Stearns in March and most recently its takeover of Fannie Mae and Freddie Mac.

Ben-Ami expressed concern that such state intervention showed no one believes in the free market anymore. Yet while the Fed chose not to save Lehman Brothers, it did not have the nerve to let AIG go the same way. The consequences, it stated would be too severe for financial markets. Given AIG’s connection with Manchester United, last week was a score draw for the free marketeers versus the state regulators.

Interestingly, as reports of the end of Wall Street dominated the media last week, owing to its so-called defensive nature, many global fund managers were piling out of the eurozone and emerging markets and going into American equities (see news, page 10). Which begs the question – is now the time to invest in a US 130/30?