The popular 130:30 and other long/short strategy managers have been doing it tough, particularly in Australia with its extended shorting ban, but at least one has been able to minimise the repercussions through pre-ban shorting of the major indices.
Nicholas Applegate, for instance, opened short positions in mid-September, selling exchange traded funds (ETFs) based on the MSCI World, EAFE and US indices for its 130:30 fund.
The US SEC imposed its short-sell ban on financial stocks on September 19, subsequently adding both financial and some non-financial names to the list. The ban was lifted on October 9. Australia was one of the few countries to follow with a total short-selling ban, which remains in place for financials.
Nicholas Applegate Global Equity 130:30 portfolio manager, Pedro Marcal, a senior vice president of the San Diego-based firm, said that the net effect was to bring the fund back to 110:10.
Because the fund is open to retail investors too in the US, its long positions cannot be lent out but are rather held with custodian banks. This meant that there was less chance of getting into the stock ownership mess that many long/short managers have found themselves in following the collapse of investment bank and prime broker Lehman Brothers.
Prime brokers that are not commercial or custodian banks, but do provide custody for hedge fund clients along with other services, have recently been under a cloud with both the hedge fund managers and their institutional clients.
Nicholas Applegate still had a poor September quarter, with a return of minus 3.9 per cent for the 130:30 fund against the MSCI’s positive 1.6 per cent. But the 12-month return was ahead, at minus 13.0 per cent against minus 17.5 per cent for the index. And the since-inception return is an impressive 2.67 per cent against an index of minus 16.05 per cent. The fund, launched in late 2006, currently consists mainly of internal and partners’ money.
Marcal, in Australia last week to speak with prospective clients, said the fund had reversed its underweight positions to the US in general and financial stocks in particular.
“At one stage last year we were net zero in financials,” he said which is a significant bet against the then-25 per cent weighting. “Now, we’re overweight, based on a bottom-up active decision … The banks, such as Bank of America, JP Morgan and Bank of New York, have access to cheap (government) capital.”
Marcal also oversees the manager’s Pacific Rim Fund, which invests in some Australian stocks, which like a lot of emerging markets had been part of the cheap credit bubble which preceded the crisis. It sold out of Macquarie Bank, for instance, after it had been a big beneficiary of the bubble.
Marcal said the manager had reduced the emerging markets exposure in the Pacific Rim Fund from about 40 per cent to 2 per cent.
“We have believed since the middle of last year that the economy would slow and that’s the way we positioned our portfolio,” he said. “We invest in companies which benefit from change. In the US we shorted the home builders and then the companies that guaranteed them and then the investment banks who lent them their CDOs… There’s always change taking place and there’s always unintended consequences of policies.”
Nicholas Applegate this year opened a sales office in Sydney, run by John Hamer, an experienced marketer. It retains its client service office in Melbourne, under client service manager Melanie Douglas.