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Martingale Asset Management LP in 2008, 130/30 Funds, and a Low-Volatility Strategy Case Solution

Solution Id Length Case Author Case Publisher
1342 576 Words (3 Pages) Luis M. Viceira, Helen H. Tung Harvard Business School : 209047
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Yes it is a good idea to invest in low volatility strategy for several reasons. The case also discusses these factors which show that certain benefits of low volatility strategy are good for the investment company. These strategies help by controlling the risk while ensuring that a certain increase in return is also obtained by the investment managers. This sort of risk cautious approach is good when the company realizes that taking on additional risk will not be a good step in the current business environment. Keeping these things into consideration, it is a good idea for the company to invest in low volatility strategies.

Following questions are answered in this case study solution

  1. Is it a good idea to invest in low volatility strategies? If so, is a 130/30 structure a good way of doing it? How can the history of Berkshire Hathaway's returns inform your view of the low volatility strategy considered by Martingale?

Case Analysis for Martingale Asset Management LP in 2008, 130/30 Funds, and a Low-Volatility Strategy

The 130/30 structure used for the short extension fund was a good way to invest in the low volatility strategy being used by the company. This is because when the company invested $130 for each $100 of equity capital while obtaining short positions for another $30. This approach helped the company get benefit of not only focusing on the long only approach but it also limited the risk of the investment strategy by engaging in additional buying. Since this strategy was created after observing the patterns of returns in past years, the strategy does pose to benefit from the observations. However, as mentioned in the case this particular anomaly where the low volatility stocks provided higher than average returns when compared to higher volatility stocks might not sustain in future years. If this happens then the company will have to adapt to market changes and create variations in the strategy. 

Several aspects of the low volatility strategy which are being used by Martingale can be seen in the history of Berkshire Hathaway's returns. Warren Buffett who has been managing Berkshire Hathaway has been in the business of investment management for decades. The return history of this fund shows that using low volatility approach does help them create more value for investors. Berkshire has focused on putting investments in stocks which offer low volatility. This approach helps the company focus on those investments which show good growth potential but their earnings are not very volatile like other stocks. They also have the feature of lower risk because price to book ratio of these companies is lower as compared to higher volatility stocks. Berkshire has also looked at the quality of stocks which it invests in.

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