Popular misconceptions about the risks involved with 130/30 strategies are exactly that, according to a panel from New York Life Investment Management (NYLIM).
During a NYLIM web exclusive on Tuesday, Tony Elavia, chief investment officer of NYLIM’s equity investors group, outlined three popular myths about 130/30, beginning with the belief that the tracking error must be increased with a shorting strategy. “Do 130/30 strategies imply a greater level of risk? There is nothing inherently risky about a 130/30 strategy compared to a long-only strategy,” he said. “For the same level of risk, you can get higher returns.”
He said the second myth involves the belief that 130/30 strategies generally lead to greater factors risk. Using an example of small cap exposure that long-only managers typically have in their portfolio, he explained that employing a 130/30 strategy to small cap stocks allowed for optimal use of information, resulting in a balanced active weight on smaller securities compared to an identical scenario using long-only strategy.
The idea that there are higher risks associated with leverage constitutes the final myth, according to Elavia, who added that there’s nothing inherently bad about leverage. “People can misuse leverage, but that is not the issue here,” he said. “We’re simply saying that when you understand what you’re doing and you’re careful about managing the risks, there is no positive relations between 130/30 strategy and risks from leverage.”
Elavia followed up with a truth he identifies as risks associated with managers who are unfamiliar with shorting stocks. “For the first time, managers who have never shorted securities will have to short them,” he said. Elavia added that shorted stocks display greater volatility, requiring specialized portfolio management construction and rules in order to manage the short position somewhat differently than the long position.
For more about alternative investments like 130/30, click here to visit A Trustee’s Guide to Alternative Investments.
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