Merrill 130/30 Poll Confirms and Surprises

Merrill Lynch (MER) releases its latest 130/30 survey results this week and reiterates that $1 trillion will be invested in 1X0/X0 strategies by 2011. While this estimate is in line with earlier prognostications from Merrill, the report’s author says a few of the findings surprised even him. Number one among those findings is the fact that pubic pensions seem more enamored with the idea of short-extension strategies that private pension plans. According to HedgeWorld:

Public funds now represent 21% of the institutional investors in 130/30 strategies, followed by endowments (19%), corporate pension plan sponsors (13%) and private foundations (11%).

The fact that corporate pensions accounted for a smaller slice of the 130/30 pie compared to public plans was a bit odd. ‘This was my number one surprise,’ said [Gordon] Latter [the report’s author]. It is easier to explain why foundations and endowments occupy a smaller space as they tend to be heavily invested in alternative investments, he said.

The survey also finds that investors are biased toward long-only managers when it comes to 130/30. This will surely add fuel to the already rancorous debate over who is better equipped to provide these funds.

Interestingly, respondents also preferred flat fees to performance fees. Nearly half said they preferred a flat-fee-only while the other half (and a majority of European investors) had a preference for either an outright performance fee or a combination of performance fee and flat fee.

The study largely corroborates the findings of a survey done in August by AllAboutAlpha and Terrapinn, the global conference organizer. Both studies found that the most prominent concern with hiring a 130/30 manager was the “manager’s ability to short”. Both studies also identified a limited track record and high fees as additional concerns. However, our survey found that investors weren’t as concerned with the additional risk of 130/30 strategies (the #2 concern according to the Merrill report) and were far more concerned with the limited track record of most 130/30 managers.

Both studies also showed about 16% of investors were already using 130/30 strategies and a further one-third are considering the adoption of these strategies. And both studies also showed that around half of investors prefer quantitative managers and 30% prefer fundamental ones.

Merrill surveyed 160 US institutional investors with assets of about $1.5 trillion. Their $1 trillion estimate (see related posting for previous estimate) was the result of a series of assumptions. Firstly, they assumed up to 20% of US institutional assets would be allocated to short-extension strategies by 2011 (mostly allocated from equities). Then they added an estimated $100 - $200 billion for US retail mutual funds and the current $50 billion invested in these strategies to get $500 billion. Finally, they applied a rule of thumb that non-US assets are roughly equal to US assets. Thus, the final number of $1 trillion.