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Fund Spy

The Bloom Is Off 130/30 Funds

130 Minus 30 = -40

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When 130/30 funds first came out, I was amused by the ideas I heard from reporters and a few investors that these funds would be good for choppy or down markets because they have long and short positions. True they do have shorts, I pointed out, but they're still 100% long whereas the typical equity fund is 95% long and 5% cash. It's an interesting idea, but don't look for a free lunch, was my response.

So, I'm not surprised that 130/30 funds as well as 120/20 funds are down like the rest of the world this year. But I am surprised by just how gosh darn bad they've been.

For background, 130/30 funds are funds that use leverage to have long positions equal to 130% of assets and shorts equal to 30%. The idea is that the manager is able to take advantage of research that indicates a stock is overpriced as well as stocks that are underpriced. Essentially you are leveraging up your bet on a manager's ability to add value though taking on only a bit more market risk than with a regular fund. The tricky part is that the manager has to be quite good at both longs and shorts to make it work.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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