130/30: More is Less at ING

The 130/30 deluge has begun, with new strategies being announced nearly every day.  London’s first known fund recently formed, and domestic firms such as Dalton, Greiner have rolled out new products over the past few weeks.  This trend will likely continue, based on the number of conversations I have had recently with BuySide shops that are incubating funds.

Last fall the Wall Street Journal took a critical look at several fund offerings, including one of the few 130/30 mutual funds open to individual investors:

October 2006
Mutual funds are starting to experiment with a risky investment strategy borrowed from the high flying world of hedge funds. The strategy, known by the unusual moniker “130/30,” is a way to place bets that stock prices will fall, in hopes of profiting from those declines. Betting on falling prices is a practice that mutual funds traditionally shy away from, although there have been a handful that have tried variations on it. But now, as hedge funds and other lightly regulated investments attract piles of investor money, more funds are trying to borrow more explicitly from their playbook.

The ING 130/30 mutual fund, which opened in April, has had a lackluster track record, down 1% compared with the 9.7% total return of the S&P 500. WSJ

The fund had gotten off to a rough start in ‘06, but the managers claimed to be “fine-tuning” the strategy.

But as Michael Markov noted, adding short positions can amplify bad bets made by the managers, increasing the probability of extreme gains or losses.  Fund managers with rudimentary risk-management skills and little experience initiating short positions can become an fund investors worst nightmare.

Last year the fund trailed the S&P 500 dramatically.  And year-to-date performance in ‘07 is more of the same.

As far as we know, robust risk/return statistics and analytics are not yet available for this nascent asset class.

But last week’s performance might be a litmus test of sorts for investors looking to see if these strategies can hold up during periods of market stress.

The ING 130/30 Fundamental Research Fund was down 6.01% last week, compared to a loss of 4.89% for the S&P 500. The one and three-month performance, in a down market, also trails the index. Furthermore, the fund is trailing the index and its “Specialty Equity Fund” peer group average, where it is lumped by Lipper, by nearly 200 basis points year-to-date.

The firm also runs a Fundamental Research Fund (IFRAX) that would appear to share the same management team and many of the positions in the the 130/30 offering. This un-hedged, traditional long-only product outperformed the 130/30 product during last weeks downdraft, and easily outperformed its hedged sibling both year-to-date and over the past year.

Although we can only speculate what another forensic analysis of ING’s fund through Markov Process International’s Dynamic Style Analysis would uncover, it is unlikely the risk adjusted returns look any better now than they did nearly one year ago.

The Dutch were unceremoniously booted out of New Amsterdam in November 1674. If ING’s tinkering does not produced the desired results, 2008 might witness another embarrassing withdrawal from Manhattan.

Dutch Trick or Treat
1440 Wall Street
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.  No positions in funds mentioned

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