While this type of investment has existed for a while in the hedge fund industry, its availability for retail investors is relatively new.
In a short sale, investors sell borrowed shares with the hope of repurchasing them later at a lower price.
[3] 130–30 strategies share three investment techniques with hedge funds; they are allowed to use short selling, they are leveraged vehicles and they typically have a performance-linked compensation.
The primary purpose of the 130–30 funds is to tap into the large pool of assets allocated to long-only managers, while the primary rationale of the strategy is to attempt to construct more efficient portfolios by allowing limited short selling.
However, if one believes, that the manager cannot generate alpha from short selling or that the higher gross exposure of a 130–30 fund is unbearable, then one should invest into a long-only strategy.
The greater part of hedge funds describe themselves as market neutral long-short equity strategies.
The worldwide growth in hedge funds was driven by three factors: the equity bear market; investor interest in absolute returns due to heavy losses and the flow of top talent into those hedge funds notching up absolute returns.
The holy grail of alpha hunting and absolute returns is a zero-sum game, producing winners and losers.
A fact that often seems to be overlooked is that performance fees, besides aligning the interest of fund managers with investors, also attain top talent.
Furthermore, the study concluded that two in three pension funds believe that worldwide overcapacity will drive down the returns.
Nevertheless, 130–30 is first and foremost not competing with market neutral long-short funds as an investment vehicle.
Instead, they should be viewed as an alternative to long-only funds, where managers can use short selling as a possible additional source of alpha.
[4] In partnership with Professor Andrew Lo of MIT and AlphaSimplex Group, Philip Vasan formerly of Credit Suisse and now BlackRock and Pankaj Patel formerly of Credit Suisse and now Cirrus Research [5] launched the first passive and investible 130/30 Equity index to compare performance of 130–30 fund.
[6] [7] [8] [9] [10] The performance of the index matches their study published in "The Journal of Portfolio Management.