As markets continue their turbulent ride, more pension fund investors are turning to 130/30 products and other long-short strategies to help offset the impact.”In volatile markets, most investors are looking for higher levels of alpha. That’s what 130/30’s all about,” said Young Chin, chief investment officer of Pyramis Global Advisors, speaking to Benefits Canada. “We’re confident these are products that are going to be in very high demand.” With a 130/30 strategy, 130% of assets are invested in long positions while 30% is sold short.Much of the interest in 130/30 strategies is stemming from concerns about the direction of equity markets. “There’s a growing concern that capital markets could be going sideways or worse,” said Chin. Part of the reason for turning to long/short strategies in the midst of a market downturn is that they can provide consistent alpha and absolute returns, noted Chin. “[Investors] are saying: ‘Can I get more alpha for the same amount of risk?'”Nearly one-third of Canadian pension funds are seriously considering or are already using a 130/30 strategy, according to a survey conducted last year for Pyramis. Of the 157 defined benefit (DB) pension plans surveyed, 26% were seriously considering a 130/30 strategy while another 4% had already implemented the strategy, also known as limited shorting. Interest in 130/30 was higher among public plans. Almost half were either seriously considering it or had already implemented it. “The large public plans are already there,” said Michael Barnett, executive vice president, Fidelity Investments ULC.However, investors need to be careful when choosing a 130/30 manager, as some asset managers are “scrambling” to develop products in this space as it gains popularity, warned Chin. A lot of 130/30 products aren’t being developed with the proper infrastructure in place, he said. “There’s going to be potential disappointment with 130/30 if it’s not done right.”Pension plan sponsors looking to implement 130/30 strategy need to ensure that the manager they hire has the infrastructure, experience, knowledge, controls and capacity in place to properly implement products on the short side, he advised.Pyramis launched its own 130/30 strategy in September 2006, as an extension of its fundamental research-based Large Cap Core strategy. As of June 30, 2007, the new 130/30 discipline was ranked No. 1 in the eVestment Alliance’s Extended U.S. 130/30 universe for the trailing one-year period. According to Chin, Pyramis also plans to launch a suite of long/short products in the coming months. It currently has between 13 and 14 long/short products “in incubation,” he said.
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