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Education

130/30 Guide

 

How 130/30 funds work

Inevitably in the course of researching targets for long-only investment, managers will also identify and discard others that are believed to be unattractive. With a 130/30 strategy they can now act on and profit from those discoveries.

The fund will earmark 100% of its assets for investment in long-only prospects, as usual. It will then take a short position on the unattractive securities that have been identified, typically up to a value equivalent to 30% of the total assets.

The proceeds from the short-sell contract are added to the fund, which now has 130% to invest in its long-only bets. In this way, for each £100 invested, subscribers are getting £130 exposure to the markets.

A word about exposure may be helpful here. The fund's net exposure is notionally 130%, and carries the risk/reward characteristics of the portfolio it is invested in. But it also bears the risk associated with its short position: the risk that it may actually cost the fund money to fulfil the contract if the predicted falls in value do not come about. The fund's gross exposure is therefore 160%.
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