Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
This mode has been described as something of a halfway house toward full-blown hedge fund investing, and the industryÆs bait to entice Japanese and Australian pension funds into the long/short universe, suggests Kirstin Hill, New York-based director at Merrill LynchÆs strategic solutions group.
ôThis falls into an equity allocation for institutional investors,ö Hill says. ôInvestors are constrained about hedge-fund allocations but have more latitude in making allocations to equity strategies like 130/30, which will not count against their alternative allocation.ö
Merrill Lynch estimates there are now 30 of these strategies worldwide with AUM above $10 billion.
Several offshore providers such as Barclays Global Investors already market 130/30 strategies to Japanese investors, but this activity is done out of BGI's San Francisco base. No Japanese fund manager has yet to develop this particular strategy; rather they continue to provide alternative investments sourced from foreign partners.
With pension funds having an allocation of just a handful of percentage points to hedge funds, 130/30 might therefore be seen as something of a test phase, a mix between traditional and alternative strategies. Why 130/30 though? Why not fiddle with that ratio, yanking it to say 250/150?
ôStudies have said that the ratio of 130/30 is an efficient one,ö says Hill. ôBut there is a diversity and different managers use different ratios. Sometimes, instead of the ratio overlay, the manager will set risk targets instead.ö
As well as taking an orthodox short position, Merrill is pitching investors another modus operandi via what it defines as an æoutperformance extension swapÆ. This derivative replaces the short-cash leg of the deal with an equity total-return swap.
130/30 methodology might also dovetail with long-only fund managers that want to jazz themselves up, taking more active-management positions rather than disregarding stocks that they donÆt like.
ôIn a long-only fund the manager might not have used shorting products before,ö says Paul Thomas, vice president at Merrill LynchÆs prime brokerage sales team in Australia. ôIf they are looking at the top 100 stocks and have a negative view on a stock, then they usually either ignore them or go to cash. 130/30 gives them another alternative. Plus they usually already have systems robust enough to handle the risk monitoring if they are from larger institutions.ö
Earlier this week, Mizuho Corporation announced it is establishing an asset management business in the United States, initially to develop loan-based securities products, and then to develop hedge funds.
Others are further along. T&D Asset Management, for example, has been incubating absolute-return strategies in Japanese equities for two years, says Hiro Fujii, senior international-relations manager. "These products will be introduced to the market after accumulating good track records," he says.
Makoto Nakamura, deputy general manager for investment planning at Mitsui Asset Trust, says, "We have been studying alpha creation methods (bottom-up research or quantitative methods); [alpha delivery] vehicles, domestic or offshore; and other operational matters with respect to 130/30 strategy. But we have not decided when we will launch the product."
Other fund houses such as DLIBJ Asset Management (Diam, an arm of Mizuho) and Daiwa SB Investments are studying these strategies. But fund officials say these are not currently popular among Japanese investors.
"This strategy is relatively new in Japan," says Kiyotaka Hoshino, general manager of the international department at Daiwa SBI.
And some providers doubt 130/30 strategies are actually what Japanese investors want.
"We do not plan to provide such a strategy to clients," says Ichiro 'Jeff' Kurimoto, general manager of international marketing at Tokio Marine Asset Management. "Long/short and market-neutral strategies have lost popularity in Japan, and we don't see a big opportunity."
Jame DiBiasio contributed to this article.
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