Martingale Asset Management

1.  Which issues should investors consider when deciding whether to invest in a 130/30 fund? Is Martingale well-suited to manage a 130/30 fund?  

A:

(a) 130/30 fund is also known as short extension strategy. It is a strategy that enhance the return on a benchmark index by using both longing and shorting. The beta exposure with respect to the benchmark is kept at one. A small portion of the portfolio value is shorted and offset by an equal value of additional long position, therefore a net 100% long is reached. (Page 3 CASE).

The short extension funds allow fund managers to more fully express positive and negative views on expected individual stock returns than in a long-only fund and provides returns with a minimum level of risk associated with it.

To justify an investment, we need to consider several aspects including return and risk of the investment, law and potential regulation change,  business nature and cost (manage fee). Return and risk are always the most important things when we talking about an investment. For 130/30 funds, this returns and risk is directly related to the decision made by fund managers.

(b) Considering the performance of the 130/30 fund (Exhibit 2), it had generated a good return of 18.2% (5% higher than benchmark). And financial ratios including P/E and P/cash flow showed constant return. Meanwhile the annualized standard deviation was low compare to other funds.

[pic 1]

In addition, exhibit 5b showed the sector analysis of Martingale 130/30 LargeCap Core 500 Fund. It showed investment was diversified in various industries and companies and this can help reduce risk.

And Martingale was one of the first asset management firms to offer short extension funds in 2004, and ranked 14th by AUM in the US short extension universe. All of above indicates Martingale is well-sioted to manage a 130/30 fund.

[pic 2]However, the investors should also be aware that short extension funds are relatively new thing since 2003. The trading strategy may still be under unexpected risk due to lack of practical test.

1.  Is it a good idea to invest in low volatility strategies? If so, is a 130/30 structure a good way of doing it?  

A:

Low volatility strategy take advantage of risk anomaly. Jacques claimed that stocks with low risk, as measured by past volatility or past beta had higher returns than stocks with high risk. Figure 10.1 (Ch.10 Asset Management, Andrew Ang) shows low volatility strategy received higher return than benchmark. These results suggested that a long-short strategy that held long low-volatility stocks and short high-volatility stocks stocks might produce a positive risk-adjustment return. And it is also proved by figure 10.1.