Martingale Asset Management Case Study

Martingale Asset Management, located in Boson, MA, is a small investment firm with 21 employees, and around $5 billion dollars under management. The firm serves institutional investors with highly quantitative, value-oriented strategies. Martingale does not believe that market timing is an effective long run strategy; rather with proprietary multi-factor stock picking models, they provide both quantitative and qualitative measures of a stock’s performance, and construct portfolios to exploit mispricing in the market. Embracing behavioral finance, Martingale believes that the overall market is correctly priced; however, they also believe that mispricing can occur at the individual stock level because investors are driven at least partially by their emotions. The firm also implements highly quantitative strategies to identify and exploit mispricing in the broader market caused by the effects of artificial asset allocations within benchmark indexes. Martingale’s founders embraced the concept of innovation, placing a strong emphasis on research and collaboration with academics. They recognize that innovation would be the only way for Martingale to remain competitive within the asset management industry.

What issues should investors consider when deciding whether to invest in a 130/30 fund? Is Martingale well-poised?

The term “130/30 fund” is used to describe portfolios that relax the traditional long-only constraint of fund managers by allowing a limited amount of shorting, in this case shorting 30% and going long 130%, in a mix of individual stocks. The strategy attempts to exceed the return of the benchmark index by relaxing the long-only constraint while keeping the Beta of the portfolio when compared to the benchmark at 1. Shorting a portion of the portfolio allows an opportunity for the manager to add value by taking a more bearish position on the stocks they feel will underperform, while amplifying their position in the stocks they feel will...