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Merrill's Benjamin Bowler, a New York based Equity-Linked Analyst, has issued a 38 page report called “130/30:  From Rationale to Implementation”. The report follows from a previous research piece led by Philip Middleton & Cynthia Mayer highlighting the growing trend for asset managers to adopt shortextension strategies. The new report has the following three sections plus an interesting appendix:

Here comes the wave Interest in short-extension or 130/30 style portfolios is rapidly gaining momentum as investors and asset managers are responding to the pressures of an increasingly competitive marketplace in the search for returns. By leveraging the flexibility that short-extensions can provide, managers aim to unlock hidden alpha.

Case-studies on short-extending shed light on benefits The benefits of relaxing the long-only constraint and short-extending appear almost universal, allowing managers to boost absolute alpha and risk-adjusted returns; however, the extent of the benefit is dependent on many factors. We explore and quantify this through a series of case studies analyzing a variety of manager styles and benchmarks in the U.S., Europe, Japan and Australia.

Challenges and mechanics of implementation The commercial and economic benefits of the short-extension paradigm do not come without some important challenges. We highlight major considerations that are likely to challenge portfolio managers and their firms in setting up,......................

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