Study: 130/30's Escaped Much of August Market Turmoil

September 24, 2007 (PLANSPONSOR.COM) - 130/30 funds - also known as quantitative "hedge-lite" funds - apparently escaped much of the damage suffered by many hedge funds during the August market upheaval, according to a new study,

Funds tracker Morningstar studied 38 of the approximately 120 such 130/30 offerings and found the offerings turned in a roughly flat August performance as compared to a 1.5% Standard and Poor’s 500 gain, according to a Reuters report.

The period of high market volatility was significant for the 130/30 funds because it was the first time they had been tested in that environment when many traditional high-flying hedge funds suffered significant slumps, the news report said.

“Turmoil in the credit markets dragged down 130/30 funds in August, but generally not as much as hedge funds,” said Morningstar.

Most 130/30s employ computer model-driven investment strategies as opposed to making subjective judgments based on traditional market research so some industry observers had assumed that 130/30 funds would get hammered in August as did other quantitative funds.

Institutional investors have committed approximately $55 billion to $70 billion to the 130/30 and 120/20 funds in recent years, according to Steve Deutsche, Morningstar director of separate accounts, Reuters said  “People were painting with a very broad brush and saying all of these quant strategies undoubtedly in serious trouble,” said Deutsche, according to Reuters. “But they do seem to have at least done reasonably well in August and year-to-date.”

In turn, according to the Reuters report, demand for such strategies has swelled assets at large institutional money managers like Barclays Global Investors, State Street Corp,, hedge funds like AQR Capital Management, Renaissance Technologies Corp and other asset managers.


The 130/30 and 120/20 funds are designed to offer investors some of the upside of hedge fund investing through the use of selective short-selling, unlike traditional money managers, which typically don’t use standard hedge fund techniques. The new funds charge lower fees than what hedge funds ordinarily charge.

Adam Sussman, senior hedge fund analyst for research firm Tabb Group, told Reuters the findings show that 130/30 funds are performing to expectations, which is to give some alpha, or market outperformance, while giving some protection against market downturns that may afflict riskier hedge fund strategies (See  TABB Group Forecasts Growth of Hedge Funds and 130/30 Funds ).