Fortis has stop-loss positions in place, so the shorting “doesn’t get out of control”. At a 40 bps loss over a week, the stock is reviewed, and at 70 bps on the same test it has to be sold.

According to Rick Roberts, a partner at US-based quant manager First Quadrant, when fundamental managers are running 1ong/short portfolios, they need to “cede control” at the implementation stage to the quant team, for risk control and implementing the short ideas. “At the centre of the debate is the question of whether all successful managers should have active extension strategies. The answer is patently ‘no’.”

First Quadrant, one of the managers with Affiliated Managers Group of the US, has been running long/short market neutral and 130:30 funds since 1991. In Australia, where the firm has had client funds for more than 10 years, First Quadrant is well known for its global macro capabilities.

Roberts says the performance of some of the quant managers last year shows that risk management was paramount. “Risk management is often misunderstood,” he says. “Our (quants’) underperformance in August was not outside expectations.” Market neutral funds, which represent the most efficient portfolios in a world that follows the Fundamental Law of Active Management, have not yet attracted super fund interest to the extent the alpha extension strategies have.

Some believe that market neutral funds, which offer the flexibility of being able to be applied over any benchmark, will inevitably gain their rightful place and 130:30 funds are providing a stepping stone for super funds to get used to the idea of shorting. Watson Wyatt’s Amos says that 130:30 funds should really be compared with hedge funds; not with long-only funds and not with concentrated funds. “They are nicely packaged easy-to-use constrained hedge funds,” she says. “The name 130:30 is misleading. There is a vast range of funds lumped in. They have the same net exposure (one) but varying gross exposures.”

She believes that over the long term, most long-only managers will be doing some element of shorting. “At least it will be on the agenda for everyone. The theoretical case (for shorting) is strong. Pricing can also look good. Some managers are very experienced and doing (130:30 funds) well. “Once you start thinking about long/short you ask yourself ‘why be limited to something that has a forced level of shorting and a fixed level of beta?’” Pricing on 130:30 funds is usually between the long-only fees and hedge fund fees. Managers will typically charge the same base as long-only and then with a healthy performance fee (say, 20 per cent) above the benchmark or benchmark plus a bit.