Comments on: Negative Alpha Is Built Into 130/30 Funds http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/ Disrespectfully tracking mergers, buyouts and other bad deals Mon, 07 Dec 2009 19:25:29 +0000 http://wordpress.com/ hourly 1 By: Tristan http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/#comment-3680 Tristan Sun, 16 Nov 2008 08:05:57 +0000 http://thedealsleuth.wordpress.com/?p=94#comment-3680 Excellent article. FYI I calculated something similar when using index futures which allow 5% performance margin. Here is my analysis: I have $100m of assets I think that Russell 2000 will outperform the S&P 500 I buy $130m worth of Russell 2000 index futures I short sell $30m worth of S&P 500 index futures Performance margin requirements = 5% x 160m = $8m Lost interest on $8m @ 4% (just an average) is $320,000 or 32bp of the original amount And that analysis suggests that in a higher interest rate climate, the impact of the performance margin (or in your analysis, the collateral) is also higher. Thanks, Tristan Yates Author: Enhanced Indexing Strategies Excellent article. FYI I calculated something similar when using index futures which allow 5% performance margin. Here is my analysis:

I have $100m of assets
I think that Russell 2000 will outperform the S&P 500
I buy $130m worth of Russell 2000 index futures
I short sell $30m worth of S&P 500 index futures
Performance margin requirements = 5% x 160m = $8m
Lost interest on $8m @ 4% (just an average) is $320,000 or 32bp of the original amount

And that analysis suggests that in a higher interest rate climate, the impact of the performance margin (or in your analysis, the collateral) is also higher.

Thanks,
Tristan Yates
Author: Enhanced Indexing Strategies

]]> By: Monday links: double dose of fees « Abnormal Returns http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/#comment-3453 Monday links: double dose of fees « Abnormal Returns Mon, 11 Feb 2008 17:31:54 +0000 http://thedealsleuth.wordpress.com/?p=94#comment-3453 [...] drag of reduced short interest rebates on 130/30 funds. (Deal Sleuth via Kirk [...] [...] drag of reduced short interest rebates on 130/30 funds. (Deal Sleuth via Kirk [...]

]]> By: The Deal Sleuth http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/#comment-3421 The Deal Sleuth Thu, 07 Feb 2008 22:22:10 +0000 http://thedealsleuth.wordpress.com/?p=94#comment-3421 David has an excellent analysis of the FAJ article (<em>Long-Short Extensions: How Much Is Enough?</em> by Clarke, De Silva, Sapra and Thorley) on his website linking the FAJ article to our negative alpha: http://www.bionicturtle.com/learn/article/how_to_include_incremental_costs_in_extension_strategies_like_130_30/ Another interesting follow-up is Greg Boop's post on his HingeFire blog: http://hingefire.blogspot.com/2008/02/will-13030-funds-hold-water.html Finally, HedgeWorld summarized the problem in a great article by Emma Trincal (by way of AllAboutAlpha): http://allaboutalpha.com/blog/2008/03/13/manager-we-would-look-at-short-extension-funds-for-the-next-big-mutual-fund-scandal/ David has an excellent analysis of the FAJ article (Long-Short Extensions: How Much Is Enough? by Clarke, De Silva, Sapra and Thorley) on his website linking the FAJ article to our negative alpha:
http://www.bionicturtle.com/learn/article/how_to_include_incremental_costs_in_extension_strategies_like_130_30/

Another interesting follow-up is Greg Boop’s post on his HingeFire blog: http://hingefire.blogspot.com/2008/02/will-13030-funds-hold-water.html

Finally, HedgeWorld summarized the problem in a great article by Emma Trincal (by way of AllAboutAlpha):
http://allaboutalpha.com/blog/2008/03/13/manager-we-would-look-at-short-extension-funds-for-the-next-big-mutual-fund-scandal/

]]> By: David Harper http://thedealsleuth.wordpress.com/2008/02/04/negative-alpha-is-built-into-13030-funds/#comment-3414 David Harper Thu, 07 Feb 2008 04:21:02 +0000 http://thedealsleuth.wordpress.com/?p=94#comment-3414 Thomas, That's great, really helpful. btw, your exhibit looks correct but the 18bps should match the 12bps (=20%*30%*2% = 12bps). The FAJ just published a study that incorporates this cost (the borrowing spread) into the IR/IC metric (it's about time that got adjusted for costs!). They went even further than you on costs. They add the above "Explicit" costs plus they add "implicit" operational cost of adding the extension strategy. David Harper Thomas,

That’s great, really helpful. btw, your exhibit looks correct but the 18bps should match the 12bps (=20%*30%*2% = 12bps).

The FAJ just published a study that incorporates this cost (the borrowing spread) into the IR/IC metric (it’s about time that got adjusted for costs!). They went even further than you on costs. They add the above “Explicit” costs plus they add “implicit” operational cost of adding the extension strategy.

David Harper

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