Why is the 130/30 approach attractive?
The desire for 130/30 strategies has grown largely out of the necessity for institutional investors to enhance portfolio returns in the face of declining long term return expectations for equities and bonds. In some cases this requirement is expressed as: “maximizing alpha within the available equity risk budget.” A number of key characteristics make 130/30 strategies attractive to institutions. The most oft-cited of these is the promise of enhanced alpha. In the traditional long-only equity space, a variety of constraints limit the ability of good managers to fully express their views in the construction of their portfolios. One of the most punitive of these is the “long-only constraint”.By relaxing the long-only constraint, a manager has the ability to increase his risk-adjusted return.
2By virtue of their construction and market exposure, 130/30 strategies fit easily into an institution’s equity allocation. Unlike investments in alternatives or hedge funds, significant capital can be allocated to 130/30 strategies without modification to the asset/liability and/or risk budget framework. Also, 130/30 strategies are typically more transparent than hedge fund investments, more easily benchmarked by consultants and more acceptable to trustees and investment committee members. Lastly, 130/30 strategies benefit from an established regulatory framework and from a friendly custodial environment. Market regulators allow leverage of up to two times in Europe, the US and Canada allowing for extensions to reach up to 150/50. Prime brokers now also offer turnkey solutions to institutional accounts where short holdings “finance” the long extension and the word “leverage“ is never used
Low volatility strategies give high returns as compared to high volatility strategy, as there is a high level of risk associated with the strategy. The