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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.

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