Experience counts for more than hype

It seems wherever you look at the moment a fund management group is launching a 130/30 fund. If it is not called a 130/30 fund its an alpha extension or alpha plus fund, but the concepts are all the same, quasi hedge funds, which allow managers to be 100% long in the market of their choosing and in addition hold a certain percentage of the fund in companies they do not like (short).

UBS this week announced it is to launch its second such fund (see news) and Threadneedle confirmed details of its first. With anything the danger for fund management groups launching similar funds at the same time, is that they can be accused of jumping on the “me too” bandwagon.

The question is, just because groups can launch such funds, should they? 130/30 funds were first launched in Australia three years ago and in America two years ago, however the majority of money invested in the sector has been in funds that use quantitative screens – that is, passive investment. In Britain however, so far all the funds that have launched or are mooted to be launched are being run actively.

This is fine if the said managers of the funds have the experience and resources to run such funds. That is, they have a track record of successfully running both long and short portfolios, preferably over a time frame longer than three years. However, for some these funds may be the first time a manager has been asked to short a company.

In the past the old adage was if you were a successful long-only manager, the next step was to go off and run a hedge fund. If managers were not leaving, fund management firms were giving them hedge funds to run in addition to their long-only duties.

The school of thought being that shorting companies would enhance long-only funds, as they would sharpen the focus on what not to hold. There was also the temptation of the large performance fees on offer from managing hedge funds.

Like anything, some managers did well, others not so and this is the key with 130/30. Despite the technical jargon, the concept is sound and is perfect for retail investors who like the idea of hedging but do not have the cash to lump in a traditional fund. The key however is not to get sucked into marketing, invest in experience over the promise of high returns.