Threadneedle offers funds with short-sell capabilities

The UK-based Threadneedle group will soon be offering investors in Singapore mutual funds with short-sell capabilities known as 130/30 funds.

Unlike traditional unit trusts or mutual funds, these funds can take both long and short positions in the markets. It is estimated that about US$50 billion is currently invested in these products, mainly by US and European pension funds.

The 130/30 or extended alpha funds which originated in the US are beginning to take hold in Europe tend to perform better than conventional long-only equity funds during downturns in the markets due to their short-selling capabilities, says Threadneedle's head of product development, Celeste Dias.

The funds take their name from its so-called 130/30 investment strategy. One which entails investing 100% of the value of the fund in a long-only portfolio of stocks, and the ability to short up to 30% of the same portfolio.

The short positions are usually established by the use of derivatives such as short futures, exchange traded funds (ETFs) or total return swaps. Re-investing proceeds from the short sales into the long-only portfolio enable the funds to have a gross exposure of 130%.

While managers of conventional funds are confined to investing in the most attractive stocks they have identified, they can only underweight or avoid counters that are expected to be market laggards.

The 130/30 strategy, on the other hand, allow them to take full advantage of their investment research, enabling the shorting of stocks that are likely to underperform in the short term.

Notes Dias, "In he past, for a fund manager who is managing a portfolio and benchmarking against an index, say the MSCI World Index: if he doesn't like a stock because of weak balance sheets or fundamentals, all he can do is to underweight his position. With 130/30 funds, he can take an active short position on the stock."

"130/30 funds offer a means of enhancing performance using the proven stock picking skills of fund managers by loosening their constraints and giving them the flexibility to implement decisions on stock picking. It gives them the tools to achieve better risk-adjusted (or alpha) returns," she adds.

Dias says that Threadneedle's competitive edge in handling 130/30 funds stems from the fact that the group has had a hedge fund operations for eight years, and hence the infrastructure, expertise and lots of practice in shorting.

"While proven success in managing long-only funds is an initial prerequisite, the manager also needs experience of running short positions. Fund managers with the expertise in both hedge funds and long-only portfolios are still comparatively rare," says Dias.

Fund management houses can employ different investment strategies in the management of 130/30 funds. For example, some may prefer a fundamental approach whereby the fund managers formulate their views on individual stocks and sectors, backed by rigorous in-house research.

Other managers may use a quantitative approach, whereby stocks are ranked within a given universe according to certain investment criteria, producing a ready-made list for buying long positions while shorting other stocks.

Within the US, most funds rely on quantitative techniques but over the last three years some of the best performing 130/30 US funds have been those who favour a fundamental approach.

Table: Breakdown of Threadneedle's global assets under management


Source: Threadneedle as at 31.08.2008.

Threadneedle currently manages more than US$110 billion of global assets, which include US$6 billion of assets from Asian clients. It is looking to use the region's two private banking hubs – Singapore and Hong Kong – to expand its distribution of funds.

It is registering 40 funds here – including global equity funds, single-market funds, hedge funds and fixed income funds – including those aimed targeted at a private banking clientele and institutional investors.

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