Growth In 130/30 Funds Set To Explode

Sep 19 2007 | 8:01am ET

Move over mutual funds, here come 130/30 plans. According to a study just released by TABB Group, growth in actively-managed U.S. equity mutual funds will remain flat at 3%, while assets in active-extension funds such as 120/20 or 130/30 vehicles will explode from $140 billion in 2007 to nearly $2 trillion by 2010, a 141% annual increase.

“A major change is underway at alpha-seeking firms,” says Larry Tabb, founder and CEO, TABB Group, co-author of the study with Jeromee Johnson.  “They are becoming more creative, moving overseas and towards frontier markets, moving up and down the capital structure, moving toward shorter-term, event-driven strategies and longer-term holding strategies that resemble private equity-type investments.”  He adds that study, Alternative Investments 2007: The Quest for Alpha, also shows that shorting and leverage are becoming more sophisticated and mainstream.
The study reveals that nearly half of all fund managers believe that their greatest source of new alpha will be generated by expanding into new geographic markets.

In terms of how this growth in the 130/30 space will affect firms catering to these fund managers, the study shows that research continues its shift from a sell-side function to one performed by the buy side, and that by 2012, the buy side will generate 63% of its research internally with spending on broker research declining significantly. 

Meanwhile, 40% of funds believe that trading costs are the most significant cause of lost alpha. In aggregate, only 35% of the firms believe brokers help them capture alpha. However, size and satisfaction are linked as larger firms are overwhelmingly more satisfied by their brokers’ ability to capture alpha.

For the study, TABB Group interviewed 67 portfolio managers, chief investment officers, heads of research and senior managers of hedge funds, funds of funds and traditional long-only asset managers with a particular focus on traditional equity managers who had started active-extension funds. Collectively, they manage $12.3 trillion with the over 90% of those assets managed by large fund companies (over US $50 billion for traditional managers and $2 billion for hedge funds). 

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