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Martingale Asset management LP in 2008

Martingale is a Boston based investment management firm founded in 1987. It is one of the first firms offering short extension fund. This case is about a strategy that William Jacques came up and wanted to discuss it with his other founder partners.

Jacques wanted to discuss the development of the minimum variance strategy based on the 130/30 funds strategy. Also known as the short extension strategy, the 130/30 is basically investing long 130 $ for each 100 $ of equity and take a short position on 30$. Based on the results of a previously published research, stock portfolios with low volatility have been showing persistent low volatility in the ensuing years as well. On top of that, these same portfolios showed comparable returns to the broad based stock indexes like the S&P 500 and the Russell 1000. Hence, using this within the same framework as the short extension strategy, Jacques wants to exploit this strategy in their investment portfolios.

In spite of the good results during the last 6 months of testing this strategy with his own money, Jacques is wondering if the results are just the outcome of another market anomaly or a fluke of data that is most probably not going to persist in the long run.

During the case, the author talks about the many shortcomings of the 130/30 funds strategy and also about how this asset management firm chooses their stocks and creates their portfolios. Martingale was one of the first management firms offering short-extension funds. In four years, they offered four funds based on this strategy. Further on in the case, the author finally explains how the low volatility – minimum variance strategy within the same framework as the 130/30 funds strategy came to interest Jacques.

A study based on low volatility and low beta stocks showed persistent low volatility and low beta with higher average returns that the fellow high volatility and beta stocks. “These results suggested that a

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