Unlocking the potential of equities: Why 130 minus 30 is more than 100

In the ever-evolving landscape of investment strategies, one approach is gaining significant attention for its potential to improve returns – the 130/30 quantitative strategy. This investment approach blends the best of both worlds, offering investors a unique combination of risk management, adaptability, and performance. In this interview, Andjelka Bannes, CFA explains the benefits of the strategy, how it works in practice and how it has performed.

What are the advantages of using a quantitative equity portfolio management strategy?

Unlike traditional stock picking, which relies on subjective judgement, quantitative strategies use data-driven models to identify and exploit market inefficiencies. This systematic approach enables the careful evaluation of a wide range of stocks, uncovering hidden opportunities that are often missed by more conventional, fundamentally driven strategies. Using advanced quantitative techniques such as factor modelling and statistical analysis, portfolio managers can sift through vast amounts of data to identify stocks with promising alpha potential, while maintaining strict risk management.

What is the 130/30 strategy and how does it help generate alpha in quantitative equity portfolio management?

The 130/30 strategy accommodates a higher degree of conviction and captures the essence of quantitative equity portfolio management. The 130/30 strategy allows investors to take both long and short positions, enabling them to benefit from stocks that are expected to outperform (long positions) while also benefiting from those that are expected to underperform (short positions). Investors can bet against assets that are expected to underperform the market. The ability to short allows portfolio managers to exploit market inefficiencies to maximise alpha while minimising tracking error (TE).

How does the 130/30 strategy maximise returns while mitigating risk?

Our 130/30 strategy aims to maximise returns by taking alpha risks that are closely linked to our value, quality and sentiment factors. Quantitative portfolio construction techniques are highly precise and enable us to increase our exposure to our alpha factors also by using negative return forecasts for stocks with lower benchmark weights. This approach results in an improved information ratio (IR), particularly in portfolios with higher tracking error (TE) mandates. Additionally, by incorporating short positions into our 130/30 approach, we harmonise size exposure within the portfolio, significantly reducing market and size risk. This harmonisation opens up opportunities to enhance risk-adjusted returns.

How effective is the 130/30 strategy in balancing risk and return in the portfolio?

The table below shows the tracking error breakdown for an active extension and a long-only strategy in the European context. The European active extension strategy carries higher alpha risks (systematic risks) while reducing size and market risk relative to the long-only approach. Despite these divergent risk profiles, both strategies exhibit a similar tracking error. This shows that the 130/30 strategy not only opens the potential for higher risk-adjusted returns but also maintains a stable tracking error in relation to the European benchmark.

Unintended market and size risk lower in active extension strategy

Tracking error
contribution in %
Long onlyActive
Source: Quoniam Asset Management, example period
How is the 130/30 strategy implemented?

130% of the portfolio value is invested in long positions. These long positions consist of stocks that our quantitative model predicts will perform well in the market. The additional 30% is effectively borrowed to fund these positions, allowing for greater exposure to potentially alpha-generating assets.

Conversely, 30% of the portfolio is allocated to building short positions. In this case, our model anticipates a decline in the performance of these stocks.

The 30% allocation to both long and short positions is managed through a dynamic portfolio swap. This strategic choice offers the advantage of full participation in price movements while mitigating the operational risks associated with shorting.

Additional risk measures:

When constructing short positions, we use only half the capital compared to a long-only equity portfolio. This approach helps to reduce risk in the short leg of the strategy. In addition, we maintain a strict focus on liquidity to ensure that assets can be bought and sold easily. High borrowing rates on certain stocks can impact profitability in the short segment, so we carefully avoid such stocks to manage costs effectively. Our commitment to risk management and sound execution is integral to the success of our 130/30 equity strategy.

How has the 130/30 European Equity strategy performed?

Since the introduction of our portfolio construction methodology for the 130/30 European equity strategy in May 2021, we have consistently delivered strong results – generating higher alpha than traditional long-only strategies in the European context. Our strategy has delivered a relative return of +10.4% over 2021, outperforming the +2.22% relative return of a long-only strategy. This consistent outperformance is testament to our ability to skilfully exploit alpha opportunities while carefully managing risk.

Why 130 minus 30 is more than 100
Model calculations strategies Core Plus Active Extension Europe (130/30) vs. Core Plus Europe (Long Only) vs. MSCI Europe. Source: Quoniam Asset Management GmbH; as of April 2023
What do you see as Quoniam’s strengths for 130/30 in European equity?

Our systematic data processing capabilities enable us to efficiently evaluate 3,000 European companies on a daily basis. By harnessing cutting-edge research technologies such as machine learning, we are able to uncover information that has not yet been priced into the market.

Our European Equities Core Plus Active Extension strategy fits well within a benchmark-oriented approach and serves as a robust core investment option. By diversifying across a broad range of stocks, the strategy offers a high degree of risk mitigation. The integration of short positions broadens the investment opportunity set, reduces concentration risk and improves the overall risk/return profile of the portfolio.

Importantly, this approach is not limited by geography and can be effectively applied not only in Europe but also in a global universe, underlining our adaptability and commitment to delivering alpha within a well-defined risk framework.