What it means
Taking a long position means buying a share in the hope that it rises, while taking a short position means borrowing a share and selling it in the hope of buying it back later at a lower price. A 130-30 fund does both at once, so it can profit from its views on poor companies as well as good ones.
The name describes the mix. For every $100 of investor money, the fund holds $130 of shares it likes and is short $30 of shares it dislikes.
The net market exposure is 130 - 30 = 100, which means the fund should still broadly move with the market. The idea is that a manager with good research can gain from the short side as well, since a long-only fund cannot act on a negative view beyond avoiding the share.
Supporters also argue that the strategy lets a manager use research more fully because the best short ideas are as valuable as the best long ones. The costs and risks are higher than in a plain share fund.
The fund pays a borrowing fee to short shares, its gross exposure is 160% of capital, and losses on a short position are theoretically unlimited because a share price can keep rising. Managers of these funds are typically judged against an ordinary stock index.
If their short selections do not beat the market, the extra fees and trading costs can leave investors worse off than in a simple index fund. Variants include 120-20 and 150-50 funds, which follow the same logic with different proportions.
Investors should read the fund's rules to see how much it may borrow, how it limits losses and how fees are charged on gross rather than net assets.
In practice
Real-world examples.
Example
A pension fund allocates $50,000,000 to a 130-30 manager as part of its share holdings. The trustees want a chance to beat the market without taking more overall market risk. They monitor gross exposure each quarter to make sure it stays near 160%.
Example
An analyst at an investment firm believes that three retailers face falling sales while a rival gains share. The fund buys the rival and shorts the three weaker companies. The short positions help to fund an extra holding in the rival.
Example
A private bank's adviser compares a 130-30 fund with an index fund for a wealthy client. The adviser shows that the fund charges 1.5% a year against 0.1% for the index. The client decides whether the manager's extra skill is likely to cover the cost difference.
Formula
Calculation
Net exposure = Long % - Short %
Gross exposure = Long % + Short %
Suppose a fund has $1,000,000 of capital. It buys $1,300,000 of shares and sells short $300,000 of shares, so net exposure = 130% - 30% = 100% and gross exposure = 130% + 30% = 160%. The long shares rise 10%, adding 1,300,000 x 0.10 = $130,000, and the shorted shares fall 5%, adding 300,000 x 0.05 = $15,000. After borrowing costs of 1% on the short side, which is 300,000 x 0.01 = $3,000, the net gain is 130,000 + 15,000 - 3,000 = $142,000, a return of 14.2% on capital compared with 10% for a simple long-only fund that earned the same 10% on its shares.Case study
Seen in the real world.
Highmoor Asset Management is an illustrative, fictional firm that launches a 130-30 fund with $200,000,000 of capital. It holds $260,000,000 of long positions and $60,000,000 of short positions, giving net exposure of 100% and gross exposure of 160%.
In the first year the market rises 8%. The fund's long picks gain 8%, adding 260,000,000 x 0.08 = $20,800,000, but its shorted shares also rise 8%, which costs 60,000,000 x 0.08 = $4,800,000. Borrowing fees of 1% on the short side add a further $600,000.
The net gain is 20,800,000 - 4,800,000 - 600,000 = $15,400,000, or 7.7% on capital, slightly below the market's 8%. The illustrative lesson is that the strategy depends on the manager choosing shorts that genuinely underperform, because in a rising market poor shorts and borrowing fees can make the short side a cost rather than a benefit.
Watch out
Common mistakes.
- Believing a 130-30 fund carries the same risk as an ordinary share fund because its net exposure is 100%, when its gross exposure and short positions add extra risk.
- Ignoring the costs of shorting, which include borrowing fees and the need to pay out dividends on shares that have been sold short.
- Assuming the short side always profits in a downturn, when poor selection can lose money even if the overall market falls.
Questions
People also ask.
What does 130-30 mean?
The fund holds long positions equal to 130% of its capital and short positions equal to 30%, giving a net market exposure of 100%.
Is a 130-30 fund the same as a hedge fund?
Not exactly, because it keeps full market exposure and is usually run as a regulated fund, while many hedge funds aim to reduce market exposure.
How are 130-30 funds usually charged?
Fees are often higher than in simple index funds, and investors should check whether the management fee applies to gross rather than net assets.
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