Martingale Asset Management LP is an investment managing company based in Boston, Massachusetts. Around the middle of the year in 2008, its Chief Investment Officer, William (Bill) Jacques, prepared for a meeting within the company along with product decision-makers. The meeting has the goal of reviewing the backtesting and real-time investment results of a new minimum-variance strategy within the framework of a 130/30 fund. Despite the encouraging results of the strategy, Bill was wondering whether there were flukes of the data which may not be a result of a true market anomaly but rather of data mining. He wanted to raise this issue to gather some explanation and to come up with a decision on whether to open the strategy to the firm's clients.
Luis M. Viceira; Helen H. Tung
Harvard Business Review (209047-PDF-ENG)
August 21, 2008
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Case answers for Martingale Asset Management LP in 2008, 130/30 Funds, and a Low-Volatility Strategy
About the Company – Martingale Asset Management LP
Martingale Asset Management LP is a quantitative, value-oriented investment management firm from Boston, Massachusetts. Their focus is to be innovate-driven by combining ideas together and having a common vision in creating something new and meaningful for their investments.
Martingale Asset Management LP believes that portfolios composed of stock with low historical volatility tend to have lower volatility in the future with returns similar to those of indexes like the S&P500 and the Russell 1000. This Minimum Variance (MV) Portfolio is a type of well-diversified portfolio that contains asset that is considered risky on an individual basis but attain a much lower level of risk, given the anticipated return, when pooled together (1). Interestingly, MV portfolios are 25% less risky than normal portfolios, yet the yield equal or greater returns.
In 1996, Martingale Asset Management LP launched the LargeCap Value 200 Strategy because after careful examination of the prices of these stocks relative to their fundamentals, the insight that large-capitalization stocks might be misvalued proved to be correct as investors tend to believe that they were fairly valued because of their extensive analyst coverage and the tendency of active managers to focus attention on smaller-sized stocks. This leads to a quantitative value of investing in the top 200 stocks of the Russell 1000 index as investors tend to believe that (2).
In 2004, Martingale Asset Management LP was one of the first asset management firms to offer short extension funds. They believed by shorting a portion of the portfolio and offsetting this short position by additional long positions until the portfolio is 100% long positioned, investors could better express their thoughts on individual return on stocks. These short extension funds are also known as “130/30 funds”, allowed a limited amount of short extension funds that is, by including a long exposure of 130% of equity capital and a short exposure of 30%, for a net long exposure of 100% and a shorting ratio of 30%.
In other words, investors will short-sell stocks up to 30% of a portfolio’s total value that they believe will underperform the market and then use the proceeds to take a long position in stocks that they believe will outperform the market. For example, an investor might invest 100% of a portfolio in the Russell 1000 and…