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Martingale Asset Management

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Martingale Asset Management LP in 2008, 130/30 Funds, and a Low-Volatility Strategy
Martingale is a Boston based investment management firm founded in 1987. It is one of the first firms offering short extension fund. This case is about a strategy that William Jacques came up and wanted to discuss it with his other founder partners.
Jacques wanted to discuss the development of the minimum variance strategy based on the 130/30 funds strategy. Also known as the short extension strategy, the 130/30 is basically investing long 130 $ for each 100 $ of equity and take a short position on 30$.
Based on the results of a previously published research, stock portfolios with low volatility have been showing persistent low volatility in the ensuing years as well. On top of that, these same portfolios showed comparable returns to the broad based stock indexes like the S&P 500 and the Russell 1000. Jacques wants to exploit this strategy in their investment portfolios.
An investor considering a 130/30 fund should weigh several factors:
• What is the exact size of the short position, and any additional portfolio constraints?: Managers may attempt larger shorting ratios as they become better at identifying investment opportunities, but this also leads to a larger emphasis on management skill and potentially greater market risk.
• How large is the historic tracking error rate?: Larger shorting ratios lead to a larger tracking error, or a deviation of the portfolio from the market performance. Does the fund exceed the typical 3-4% tracking error?
• What are the tax implications created by the fund?: Are funds being borrowed or only obtained through short sales to cover the extra-long position? Funds that borrow money for the long position incur additional tax liability.
• Are there enough dividends in the long position to cover the short dividend obligation?:...

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