CSM, which began trading on the NYSE Arca Exchange on Tuesday, is the first ETF on the market to follow a 130/30 strategy. The ETF seeks to track the Credit Suisse 130/30 Large Cap Index, which was introduced by Credit Suisse in 2007 in collaboration with AlphaSimplex Group. The index was designed by Dr. Andrew Lo and Mr. Pankaj Patel, CFA, who described the underlying principles of the quantitative-based index in a 2008 paper, “130/30: The New Long-Only.”
In a 130/30 strategy, portfolio managers will short 30% of the portfolio value, thereby allowing themselves to maintain long positions equal to 130% of the total underlying assets.
The investment strategy is relatively new, bursting on to the scene in the last five years, and drawing a fair amount of criticism during its relatively brief existence to date. The Economist once dubbed 130/30 funds as “hedge funds lite,” referring to their implementation of long-short strategies that have been a staple of hedge funds historically (Christopher Holt at AllAboutAlpha.com has covered the strategy extensively, for those interested in reading more).
Prior to the introduction of the Index in 2007, 130/30 managers were primarily measured against the performance of long-only indexes, which obviously utilize very different investment strategies than long-short funds. Earlier this year, Credit Suisse released a research paper indicating that long-short strategies had gained popularity in the turbulent macroeconomic environment.
Scratching the Surface
Most investors think of ETFs as passive investment vehicles that offer cheap beta by tracking well-known equity and fixed income indexes. In reality, however, there are hundreds of ETF options that attempt to generate alpha while maintaining the relatively-low cost structures that give ETFs a distinct over traditional actively-managed mutual funds.
PowerShares and First Trust are the best known issuers focusing on this space, with each offering dozens of funds that utilize proprietary screening methodologies to select stocks poised for capital appreciation. The 130/30 strategy to which the new ProShares ETF offers exposure obviously flies in the face of traditional indexed ETFs that buy and hold the entire index without attempting to separate the stars from the dogs.
In recent months hedge fund ETFs have burst onto the scene, offering Average Joes exposure to strategies that were once reserved for the ultra-rich (I should note that there has been a great deal of skepticism surrounding the idea that these ETFs will actually replicate hedge fund returns).
IndexIQ was the first into the field with QAI, and has since added a follow-up offering in MCRO. WisdomTree followed, recently filing to launch three new actively-managed ETFs implementing hedge fund strategies.
Read the ProShares press release here.
Disclosure: No positions at time of writing.