130/30 Investing: Just Another Hype or Here to Stay?

Abstract

By having the flexibility to take on short positions, so-called 130/30 funds provide classic beta exposure in combination with an enhanced potential for generating alpha. We discuss the main theoretical pros and cons of 130/30 investing and compare various ways in which 130/30 funds are being constructed in practice. We conclude that a 130/30 approach potentially offers significant efficiency gains, but that sufficient alpha generating capability is required to actually capitalize on this potential, especially on an after-cost basis. We are skeptical with regard to 130/30 equity funds that do not attempt to create an integrated 130/30 portfolio, and also with regard to several recent variations on the 130/30 theme, such as 130/30 bond funds and 130/30 indices.

Keywords: Portfolio Management, Portfolio Construction, 130/30, Short-Extension, Alpha-Extension, Enhanced Active Strategies, Long-Only Constraint, Short Positions, Alpha, Beta, Equity Strategies, Hedge Fund Strategies, Alternative Investments, Hedge Fund Strategies

JEL Classification: G11, G23