Martingale Asset Fund Mangement

                                                                        Uğur Çamkeser
                                                                                AD472 – Case1

Martingale Asset Management was founded in 1987, based in Boston. The firm manages equity funds for foundations, public retirement systems and corporate pension plans. The firm is generally do index investing for institutional investors. Martingale had 21 employees, and 12 of them are partners. The firm has fully owned by its employees. Martingale’s investment team think that markets are relatively efficient in the long run; however, they also believe that mispricing in stocks exist.

According to “Rank of Short Extension Managers (March 31, 2008), Martingale is on 14th rank and its assets were more than $1 billion. Its rivals are very big and powerful; however, Martingale has showed its managerial and financial competence to customers and public among the years. When Martingale was founded, the sector was getting bigger and bigger. And there were lots of players. They’ve faced with global financial crisis, unlikely the other small firms they’ve continued to be player in the market. The results and statistics show us, they are very edge in investing.

130/30 strategy brings flexibility to investors; thus, the strategy can expands managers’ ability to use their portfolio on both sides of the market. They have opportunities to make money even in bad times, crisis etc. In addition, enhancing the potential return of the portfolio is a key priority for the asset management firms and 130/30 strategy is well suited to do it by shorting some part of portfolio with stocks that have high volatilities and lower expected returns. Shorting high risky stocks help the company to increase expected return and as well as to reduce volatility of the portfolio. Furthermore, they can expand their portfolio by using the extra money that emerges from short position. However, it has also some certain disadvantages including short squeezes, additional transaction costs and more complexity.

Taking short positions and as well as long positions required different skills from investors and 130/30 strategy brings more difficulties and complexity to investors. Calculations and effort to keep the ratio constant are different from the other investment mandates. According to BRLI Short Interest, powered by gurufocus, since 2010 there have been significant increase in short positions. In the future, short positions will be more prevalent than today and the ratio’s can be changed. Furthermore, firms that have only short positions can emerge. Therefore, I can see 130/30 strategy as an medium product, different than traditional-long portfolios.

Martingale is the one of the company that uses 130/30 strategy in their portfolio construction process. And the firm shapes their portfolios with low-volatility strategies. They generally avoid from high volatility stocks and they are generally ignoring capitalization-weighted benchmark for creating their portfolios. Their strategy has been active for more than 20 years and their profitability and total assets was grown over the sector average. Thus, it can be said that their investment team is quite successful to generate alpha and beta.

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