eFinancialCareers

As more and more fund managers look to exotic products like 130/30 funds, a massive gulf in skills is developing.

In a 130/30, up to 30% of a portfolio can take a short view, with the proceeds of the short sales used to purchase 30% additional longs.

Sounds confusing? Well, that’s the point. These funds, often tagged ‘hedge funds light’, beef up returns, making traditional managers keen to get a piece of the action. The problem is that, with fund managers usually focused on going long, there aren’t enough people skilled in the art of shorting stocks to run them.

Amin Rajan, chief executive of fund management research company CREATE, says: “Most fund managers are trained to take long-only positions. If they then take a short-term view without the right training, the potential for losses is infinite. Many firms are just dipping a toe in by rolling out 110/10 funds.”

The FSA highlighted worries about fund managers moving into new complex areas in its 2008 Financial Risk Outlook, saying, “It is questionable whether all asset managers have the appropriate systems and skills to manage and control the wide range of new products available to a consistently high standard.”

Peter Fuller, director, fund research, at Standard and Poor’s, reckons there’s a myriad of concerns when embarking on 130/30 funds: “It is not just the fund manager's ability to select short positions that is important, but also the experience of the company’s trading desk, its knowledge of counterparties and its risk monitoring skills, that need to be taken into account.”

Perhaps not surprisingly, Rajan says those skilled in the arts of 130/30 are being relentlessly pursued: “They have turned into intrepid job-hoppers, which is helping nobody. It doesn’t solve any problems for the industry. People are looking for the overall package – high salary, big bonus and equity stakes in the business. Many people aspire to be 130/30 specialists, but very few actually are.”

Giles Crewdson, partner in the asset management division at recruiters Korn/Ferry, says it’s mostly quant houses that are rolling out the funds, and that they lack the investment skills to fully exploit them: “Going forward, active houses will begin to launch these funds. The fees are higher than traditional long-only funds, and it allows individuals to learn a new skill without having to go off to a hedge fund.”

So, should you should rush off and acquire the skills to jump on the 130/30 gravy train? Not necessarily.

Rajan adds: “Over time people will develop the skills, but the paradox is that once a large number of people can do it, it won’t be a viable strategy anymore. All the opportunities in that space will be arbitraged away when too many firms enter the field.”