1. Is the UBS US 130/30 Equity Fund a hedge fund?
No, it is an equity fund that seeks to generate higher returns than a standard long only' fund, with market risk similar to that of it's benchmark, the Russell 1000 Index. Also, US Equity 130/30 returns are expected to be highly correlated to the Russell 1000 Index. Hedge funds pursue uncorrelated absolute returns. This strategy does not pursue absolute returns.
2. Who may this Fund be suitable for?
The Fund may be suitable for investors looking for the potential of higher returns from investments in the US equity market, who are willing to accept a higher level of active risk.
3. What is the advantage of incorporating a long/short strategy into a portfolio?
In long-only portfolios, we can take meaningful active positions in undervalued stocks. However, we are limited to either underweighting or avoiding stocks that are overvalued. By relaxing the long-only constraint and enabling short positions in overvalued securities, we have the flexibility to pursue an additional source of alpha in overvalued stocks by effectively increasing the magnitude of the portfolio underweights.
4. Aren't quantitative managers better suited to offer this type of product because they analyse the entire benchmark?
Not necessarily. While it is true that they consider all stocks in a universe, they often take a large number of very small positions, and usually have a tracking error no higher than 5.0%. We have 27 research analysts* and therefore have the resources to evaluate and rank more than 500 stocks in the Russell 1000 Index using our Global Equity Valuation System (GEVS). Because we have performed detailed fundamental analysis, we are comfortable taking larger positions and larger tracking error, enabling us to more fully utilise our investment insights. Our fundamental strategy should have less correlated returns than those of quantitative managers.
*Source: UBS Asset Management as at 31 March 2008
5. Do short positions help to lessen the portfolio's downside?
No, this strategy seeks higher expected returns at levels of risk similar to that of the Russell 1000 Index.
6. Isn't shorting expensive?
UBS Asset Management is able to obtain the most competitive securities lending rates with top prime brokers. Because we are shorting primarily large capitalisation, liquid names, they are easy to borrow at a low cost.
7. Will your investment timeframe change because you are now shorting securities?
We expect holding periods for each security to be similar to that of our UBS US Equity Fund. However, we expect portfolio turnover to be higher because of the increased number of holdings and the increased gross exposure.
8. Doesn't shorting securities increase the riskiness of a portfolio?
Yes, if the short securities should go against us, then the size of the short positions would become larger and thus become a bigger contributor to active riskas opposed to long positions that decline in value. Because of this increased risk, our short positions are meaningfully smaller than our long positions. Short positions account for about 20% of the total securities in the portfolio. The fund manager implements a limit of 3% of the Fund's overall net assets in a short position.
9. Isn't shorting in some way sinister or unpatriotic?
No, we are in the business of valuing companies. An excellent company can be overvalued and be a good short; conversely, a poorly run company could be undervalued and be a good long position - we are indifferent to the opportunity set.
Philosophically, as money managers we are capital allocators, and our job is to allocate capital to companies that are positioned to produce strong cash flows for the benefit of investors. By shorting stocks with lower return prospects, and then investing the short proceeds in companies with superior returns, we are simply allocating capital more efficiently.
10. Does the UBS US 130/30 Equity Fund employ leverage?
The Fund may use leverage; however, its net market exposure is expected to be 100%. The Fund's gross market exposure will normally range from 120% to 180%, with its long exposure ranging from 110% to 140%, and its short exposure ranging from 10% to 40%.
11. Why do you believe the Fund's investment team will be successful at shorting stocks? Doesn't shorting require a different skill set?
UBS Asset Management has a 25-year track record in successfully investing in underpriced stocks and avoiding overpriced stocks. By leveraging our expertise in this area, the strategy has the flexibility to pursue more alpha by shorting a select number of overvalued securities that we believe will underperform the market. Importantly, the UBS US 130/30 Equity Fund is managed by the same team as the UBS US Equity Fund, which has added value to our clients' portfolios for 25 years. Combining our proprietary Global Equity Valuation System (GEVS) with our state-of-the-art risk management system, the team seeks to identify securities with the potential for establishing the most rewarding long and short positions.
12. What investment strategies will US Equity 130/30 use to pursue added returns?
The investment team will seek to provide alpha by employing three main strategies: taking long positions in undervalued securities and taking short positions in overvalued securities.
13. How many securities will typically be in the Fund's portfolio?
The portfolio will typically contain 80 to 120 securities. Long positions will be comprised of 50 to 70 securities, with individual weights of approximately 1% to 4%; short positions will be comprised of 30 to 50 securities, with individual weights of approximately 0.25% and 1.25%.