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Investment
Sunsuper adds long/short to Aussie equities

The industry fund is adding a long/short manager to its Australian equities allocation after sticking with long-only strategies.

Sunsuper head of listed markets Greg Barnes said the fund is looking to add what he describes as an "extended alpha" strategy, which are also commonly called "active extension" long/short strategies or more colloquially "130/30" or "120/20".

Essentially, these strategies allow the manager to invest up to 30% or 20% of their portfolio's assets in short positions, and then reinvest that into the long side.

The addition comes after two years of Sunsuper weighing long/short's place in its portfolio. It finally decided, a long/short addition would have a higher return potential, a higher tracking error (which the fund desires) and fee effeciencies relative to the additional alpha.

"The extended alpha strategies really allow managers to express full view of their investment insights. The nature of the Australian market is it is difficult for managers to fully implement a negative view on a stock by just underweight that stock," Barnes said.

"For example, the median stock in Australia only represents 0.8 of the benchmark [by market cap]. So it becomes very difficult to express a negative view on the stock [by just going underweight]."

Barnes cites bank stocks and BHP or RIO as examples, where an underweight would allow the manager to express their negative view strongly as they are a big part of the total stock market. But the same wouldn't work for a smaller stock.

"By relaxing the short constraint and allowing those managers to go short a stock, it means they can implement the full negative view on that stock," he said.

Sunsuper is in the process of implementing, but the allocation could be potentially 5% of the total Aussie equities portfolio.

Barnes said "maybe a third" of the total alpha delivered by the strategy will come from the short side.

The fund plans to look at long/short's utility in global equities allocations in the future, and already uses market neutral strategies in its alternatives portfolio.

One value add for Sunsuper in implementing the long/short strategy is, it can use its current stock lending program to help the manager that is hired by allowing them to borrow stocks they are looking to short from Sunsuper's portfolio.

"Where the managers need to borrow some stock, we can use some of our own inventory to facilitate that and thereby, reducing the cost of borrowing those stocks to the manager," he said.

"...That process allows us to sweat out assets a little bit more as well. So we should be getting a higher return from some of the passive assets following this process, which lowers the transaction costs or the overall implementation costs."

Sunsuper has invested in long/short strategies before but through a traditional fund structure rather than a fully segregated approach that it is taking this time.

In adding the strategy (whose manager is yet been disclosed), it is also choosing against the other option in long/short strategies - variable beta which places loser limits on net market exposure limits for the strategy.

Read more about long/short strategies in Australian equities in our September 28 edition, available online here.

Read more: SunsuperGreg Barnes
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