He says that since the credit crunch, however, investors are taking more notice of the managers which use fundamental analysis. “You could argue that some quant signals are becoming self perpetuating, that the markets are becoming pre-emptive in their predictions.” Usually about two-thirds of the alpha for the Tribeca active extension fund will come from the long side, so Fenton sees the long/short fund as being “simply more efficient” than long-only.

In the selection of a fundamental approach to long/short, investors need to be wary that the manager truly has the skill set to short stocks. Analysts take time to adjust from a long-only environment and fundamental managers generally need more resources to analyse potential shorts. Van Eyk showed where its preferences lay in its latest Australian equity review, which included active extension managers for the first time. Of the five 130:30 type offerings it deemed good enough to be rated, four were quantitative-based and just one was fundamental.

While critics may question the relatively short time periods that 130:30 funds have been operating, a couple of post graduate students at Stockholm School of Economics, Carl Armfelt and Daniel Somos, set out to show, in theory at least, how these funds will tend to outperform in all market conditions over a very long time.

Armfelt and Somos used a statistical technique to analyse the performance of active extension strategies using 25 Fama-French portfolios formed on size and book-to-market valuations. The portfolios all had a beta of one and gross exposure above 100 per cent of net asset value (which means they had some shorting), back-tested to just before the Great Crash of 1929. “Our study shows that a pool of active extension 130:30 portfolios outperform a pool of long-only portfolios over the full sample period from 1927-2007,” the authors say. “Looking at shorter 10-year periods, the active extension portfolios predominantly outperform the long-only portfolios (that is, have better risk-adjusted returns). The results are especially robust for the second half of the 1927-2007 period.”

The 10-year average annual return for 130:30 funds, over the entire 80 years, was 15.9 per cent, against 14.1 per cent for long-only using the same alpha sources and 10.1 per cent for the benchmark. In the most recent 10-year period the gap was bigger: 20.0 per cent a year for long/short against 16.8 per cent for long-only between 1997 and 2007.

The argument in the academic world, almost since Richard Grinold and Ronald Kahn further defined the “Fundamental Law of Active Management” in 1994, is not whether relaxing the long-only constraint makes for more efficient portfolios but rather what the optimum level should be. In Australia, 130:30 is the norm whereas in the US, 120:20 funds are just as popular.