A year ago, active extension strategies such as 130/30 were ôthe new paradigmö, says Jason Toussaint, senior investment strategist for quant at Northern Trust Global Investors in London. But asset-gathering disappointed, particularly after the surprising losses suffered by many quant strategies in August 2007. A combination of bad performance, rapid changes to accounting rules and negative press put an end to many institutional investorsÆ experimentation with 130/30.

But he says these strategies have been performing well since. ôIt will require time for a consistent track record to emerge,ö Toussaint says, but he thinks by the middle of next year, 130/30 strategies will have shown consistent out-performance compared to fundamental active equity managers.

Active-extension strategies are likely to do well in part because so many institutional investors have reacted to the credit crisis by moving assets out of traditional active funds and into passive ones. They have shied from quant strategies, which underperformed as many hedge funds had to de-leverage and unwind positions. There are now fewer players in the space, but they claim to be more committed to it. With most of this unwinding having taken place, 130/30 strategies should continue to perform relatively well, Toussaint argues.

But he acknowledges that the market turmoil of the past month, along with bans on short selling in many jurisdictions, will inevitably have an effect. It is too early to know yet what this will be, and whether active-extension strategies will be able to outshine long-only ones.

Once a track record is established, investors will still need to come to grips with how to treat active extension. Although a 130/30 portfolio can serve as either a beta or an alpha source, ô130/30 funds are not hedge funds because they are benchmark-relative strategiesö, Toussaint says. ôThe challenge for these strategies is implementation, understanding the relationship with the prime broker, whoÆs got custody of the assets, whoÆs responsible for reporting.ö

In Asia, he acknowledges that the lack of defined-benefit pension plans has led to few takers for 130/30. But as more institutions seek to reduce risk by diversifying more into different strategies and asset classes, there will be demand for quant as well, particularly strategies that deliver high information ratios. ôThe pendulum will swing back,ö Toussaint says. ôItÆs up to us to continue the dialogue.ö