130/30 Outperformance: Nature or Nurture?

To uncover underlying genetic predisposition for certain kinds of physical or mental health issues, scientists often study identical twins that have lived apart for some time. The assumption is that any similarities between the twins must therefore be a result of genetics, not environment - of “nature”, not “nurture”.

Gordon Johnson of Lee Munder Capital in Boston has been performing a similar of experiment on 130/30 funds for some time now. He has been comparing the results from long-only and 130/30 funds managed by the same investment manager. By comparing funds with the same underlying genetic code (the managers’ unique investment views), he aims to determine whether the use of a ”short-extension” per se leads to a fundamentally different outcome.

Johnson’s previous research indicated that 130/30 funds have indeed outperformed their long-only twins. He has recently updated his findings to include the second half of 2007 - a volatile period for both the market and for 130/30 funds. We were curious to see these results because Johnson’s previous findings were based on years when the market appreciated.

It turns out that the addition of the rest of 2007’s data reinforces his earlier finding that 130/30 funds have out- performed long-only funds managed by the same managers.

As you can see from Johnson’s new chart above, over the past 42 months 130/30 funds have significantly outperformed their traditional siblings (note: he finds only 8 sets of twins in the eVestment Alliance database.)

So it appears that when it comes to 130/30 funds, “nurture” continues to count for a lot.

Comments

[TraderNick]

Looks like the 130/30 is doing well in this market. It seems like pension managers will side with the 1x0/x0 style when caculating VAR vs. thier long only or hedge fund counterparts.