Despite the growing popularity of 130/30 strategies, this market remains in its infancy and is likely to change in radical ways over the next few years. One potential transformation relates to who will eventually dominate the 130/30 space.
But first, let’s define what we’re talking about. In a 130/30 strategy, a money manager shorts 30% of the portfolio and uses the proceeds from those short positions to fund an additional 30% long position, resulting in a 130% long and 30% short portfolio. The strategy results in a net neutral exposure to the market of 100%.
Speaking in a general way, long-only managers whoo are looking to launch 130/30 strategies face a dilemma. Their investors are eager to invest in these funds, but many traditional portfolio managers don’t believe they have the skills to manage them. As a result, most long-only managers have remained on the sidelines.
A 130/30 fund relaxes the long-only constraint, allowing the manager to do some shorting. This can be attractive to both the manager and the investor, as the shorting makes for a nice hedging tool. It represents a way to manage risk that cannot be found in a traditional long-only product.
Investors, for their part, also can be attracted to 130/30 funds from an allocation standpoint. For pension plans that have already maxed out their hedge fund allocations, 130/30 funds allow them to add more non-traditional equity investments to their equity buckets. The goal is to outperform the benchmark while minimizing risk.
However, there are some obstacles to 130/30 strategies–a major one being skill. Because 130/30 strategies require shorting proficiency, long-only managers have not always been comfortable entering the space.