Coombe does not like the distinction of 130:30 managers being split between quants and fundamentals. “Managers are a mixed bag,” he says. “When we started we just had quants but we decided to look across the whole market. We have moved to fundame-ntal too.”

JANA put ARIA into the old Suncorp long/short fund and has other clients in the Paradice portfolio which allows up to 115:15 long/short. Coombe says that the most difficult part for a traditional long-only manager is to get the analysts to think about short stock ideas. “You have to incentivise and encourage them in different ways. Suncorp shifted the portfolio manager to the trading desk.”

JANA had hoped its exposure to long/short funds would protect it in a down market, the first test being last November. The protection did not eventuate because of the poor returns for the big quants. “We think this was because it was a liquidity event,” Coombe says. “A lot of hedge funds used quant techniques to decide how to run money. We had huge de-leveraging and as the balloon got smaller they had to sell their positions.” He says that quant strategies are not dead; they have just been through a bad period. Performance has picked up since the end of March. “If quants are dead then so is active management.”

The “mixed bag” of managers includes some quants which do not use factor-based signals, such as AXA Rosenberg, and some fundamental managers which have relatively concentrated portfolios, such as Fortis Investments (formerly ABN AMRO). Concentrated portfolios are generally considered the antithesis of long/short, certainly in the academic literature.

While purists may prefer long/short over concentrated, for funds it may come down to the practicality of the costs of generating the alpha. Coombe says they may ask: ‘is the alpha generated sufficiently high that we’re not better off with a concentrated portfolio net of fees?’ However, I haven’t met many trustees who can stomach the volatility of a concentrated fund.”

The most recent additions to the long/short universe in Australian equites are from fundamental managers: BT Investment Management, Challenger International, Colonial First State and, the latest, from UBS Global Asset Management. These, together with quant funds from Acadian and Perpetual are not included in the Mercer survey published with this report. UBS expects to launch a 130:30 fund in October, to be run by John Campbell, who works with Stephen Wood, the portfolio manager of the firm’s Emerging Companies fund. He has been running a paper portfolio which will be seeded with internal money in July.