Debunking 130-30 Performance

Extended equity strategies might be delivering favorable returns now—but manager selection remains imperative to finding alpha, according to Aon Hewitt.

Despite recent positive performance by 130-30 strategies—allocations that are 130% long and 30% short—the vast majority will experience cyclical returns, Associate Partner Adrian Kurniadjaja argued in a blog post.

“Manager selection is key,” Kurniadjaja wrote. “Choosing the best strategies available may increase the likelihood of outperformance versus an approximate benchmark net of fees on an ongoing basis.”

According to Aon Hewitt, global equity 130-30 strategies have experienced a 45% increase in assets under management over the last three years, as the strategy has beat both benchmarks and long-only managers.

However, Kurniadjaja argued that continued outperformance by extended equity strategies will rely on three factors: the ability to increase the number of forecasts to include negative forecasts; the efficacy of forecasts for both longs and shorts; and the ability to construct portfolios that adjust for the complexities of shorting.

While the first factor should be achievable by any quantitative manager, consultant warned the difficulty of the latter two “should not be underestimated.”

“The additional skills required to manage a 130-30 strategy… remain a barrier to better returns,” Kurniadjaja wrote.

Once 130-30 returns were adjusted for the additional exposure and carry, Kurniadjaja found “very little alpha.” The results were similar for diverse, less efficient asset classes such as global equity—but top performing managers were “much stronger.”

“This is a reminder that there is no panacea in the search for alpha and that one is required to identify truly skilled managers in less efficient asset classes,” he concluded.

Source: Aon Hewitt’s “130/30 Renaissance”  

Related: Testing the Limits of Manager Selection & Are You Lucky or Skilled?