Martingale Asset Management Case Study

Melis Ecem Özdemir

Martingale Asset Management Case Study

Martingale Asset Management LP is a successful investment management company that values quantitative research. Even though it believes markets are efficient in the long run, anomalies occur due to the fact that individual investors’ strategies sometimes result in biases. Hence, the company is also interested in behavioral finance and tries to exploit market anomalies for better returns for their clients.

Martingale offers short extension funds, also known as 130/30 funds. This strategy enables asset managers to extent their long position with taking limited short position. When compared to classic long-only positions it has advantages.

First of all, there is a leverage effect: With the same net position as long-only strategy, it enables the asset manager to hold more long position in the market. For example, if you want a net position of 100$, you can just long 100$ with long-only strategy. However, with 130/30, you can long 130$, while shorting 30$ which totals 100$.

Moreover, short position aspect of 130/30 strategy makes investors benefit from underperforming assets as well. Long-only strategy generates returns only from the assets held in long position. But, if used well, 130/30 strategy could result in more return both from long and short positions. Basically, one should open long positions for assets which are believed to outperform and short positions for the ones that will underperform. Therefore, 130/30 strategy enables investors to use negative information in their favor.

Although 130/30 strategy promises more return from the traditional long-only strategies, it also has disadvantages. One of them is higher costs. With more positions open, there are more transaction costs. Moreover, short positions held more cost naturally due to the fact that there are more intermediaries when shorting assets. These high costs are reflected to the investors hence 130/30 strategies are more expensive.

130/30 strategy might get affected from overall market performance more than traditional long only strategies. If the market goes down, long/short balance of the portfolio might deteriorate, and the weight of long positions decrease while short positions’ increase. In order to rebalance the portfolio back to the previous position weights the firm might incur loss. If market fluctuates frequently, this rebalancing problem might make investors lose money.

Another problem might be selecting the wrong assets for short portfolio. If the value of assets in the short portfolio starts to go up, investors

...