A survey I read of today left me despairing of some so called investment professionals.
130/30: Fad or new investing paradigm?
Thu, 06 Sep 2007, 11:15
How would you complete the following statement? I consider 130/30 strategies to be: a) A marketing fad; b) A new investment paradigm with long-term potential. In a recent survey of 135 institutional investors, asset managers, consultants, and service providers, 62% chose “b) a new investment paradigm with long-term potential”. The survey was conducted jointly by Terrapinn, a producer of conferences on this sort of topic and AllAboutAlpha.com
For the clarity of some readers, let me explain what is meant by 130/30. Let assume you’ve £100 cash in a portfolio and you use it to buy shares. By using such a “long” only strategy means you can only profit if your stocks rise in value. Yet, most people hold views that some stocks are over-valued or that they are likely to fall in the future. It is possible to profit from such falls by holding “short” positions, which effectively means selling stocks you don’t own (there are many ways to achieve the same effect through derivatives too). So, you now take out “short” positions with a value equivalent to £30. As well as giving you exposure to falls in prices for those stocks, they also generate funds from the sales proceeds that allow you to buy more stocks which you think will rise.
Hence you can end up owning “long positions” with an equivalent value of £130 and short positions of £30 (minus value in the portfolio), which brings us back to £100. People holding stocks anticipating them to rise are normally termed “bullish”, whilst expecting prices to fall is termed “bearish”.
So, returning to the survey, assuming 100% of those surveyed answered the question [irrespective of whether they understood it 😉 ], then 38% considered a long/short strategy to be a marketing fad, or more specifically they thought that using a short strategy was a fad.
Huh? Do these people ever read their own material – “Stocks can go down, as well as up”. Do they think it makes sense to trawl through stocks only looking for those which they think will go up and ignoring those which they clearly believe will not. By definition, they must be forming a view on which ones are the “likely losers”.
Of course, operating a “short” strategy can expose you to new risks, notably that the prices of your short positions could dramatically increase and you would have to pay out the uncapped losses. But then, your long positions could fall in value to zero wiping out the portfolio. More importantly, most fund managers would employ mechanism to cap such losses or simply trade out of their positions.
This isn’t racy or rocket science, just common sense investment. Some folks are just too full of bull.