Members of the Alternative Investment Management Association (AIMA) decided that 1X0/X0 strategies are not a marketing fad following their fifth annual luncheon debate at the National Club in Toronto on Wednesday.
The debate between David E. Gold of Watson Wyatt and Jean D. Masson of TD Asset Management Inc. was titled 1X0/X0 Hybrid Hedge Fund Strategies are Simply a Marketing Fad, and was framed as a parliamentary debate with Gold representing the government and Masson serving as leader of the opposition.
The government was allowed to make its case first. Using a metaphorical approach, Gold compared mutual funds and 1X0/X0 funds to pickup trucks, arguing that, like a mutual fund, an old truck is comfortable and well understood. “The mutual fund has been around a long time,” he said. “And it’s got its place in the portfolio.”
He then described the innovations evident in a new truck, such as anti-lock brakes and stereo systems, which add value to the product. “The 1X0/X0 is not a new pickup truck,” he said. “It’s a fixed-up old truck, shiny on the outside but the same on the inside.”
Calling the hybrid funds “mutual funds on steroids,” Gold argued that the 1X0/X0 funds will prove to be a fad as they have no track record from which to identify a trend, and constrain investors through poor shorting capabilities. “I can tell you first hand that this type of fund with no track record and tougher times ahead for alpha generation, is just not an ideal framework to consider an alternative,” he said.
Gold asserted that 1X0/X0 funds are a fad disguised as a trend and argued that the use of the new product may be a fad, but the push for alternatives is the real trend. “Fads have finite beginnings and finite endings, and we’re still witnessing the beginning,” he said. “If you want to buy a beta one, and think you’re going to get alpha, you’re only fooling yourself.”
Masson, referring to his “Luddite colleague,” took the floor and outlined the differences between fads and trends. “Fads become popular real fast with a small group of people, and then fizzle because they have no real social, political, or economic significance,” he said. “Notably Cabbage Patch Kids, lava lamps, and more recently asset-backed commercial paper,” drawing a laugh from the audience.
“Trends pick up momentum,” he said. “Because they bring real benefits, they will really take off. 1X0/X0 funds will bring better returns and less risk.” He pointed to pickup trucks replacing the horse and buggy, computers replacing the pen and paper, and suggested 1X0/X0 strategies will replace hedge funds
He refuted Gold’s claim that 1X0/X0 funds are constraining, arguing that it actually removes constraints, as it allows investors to short when they want to. “It’s still constrained,” he said. “But it’s less constrained than long only.”
Masson also argued that 1X0/X0 funds allow for new alpha generating opportunities. “1X0/X0 allows the manager who has real skill to employ his skill on the positive side as well as the negative side,” he said. “With these kinds of strategies, the gains become symmetrical. If you’ve got forecasting skill to the extent that you believe in active management then you ought to believe in 130/30-type strategies.”
In keeping with the parliamentary theme of the debate, the audience was asked to vote on the winner with a show of hands. The opposition led by Masson won a resounding victory.
For more about 130/30 and other alternative investments, click here to read our special section, A Trustee’s Guide to Alternative Investments.
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