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Hedging your bets

Steeped in incongruity, 130/30 funds have been labelled everything from “the optimal investment solution” to the “worst of both worlds” as they hang on to the coattails of hedge funds to become a mainstream product in the investment arena.

Some have even gone as far as calling them the latest tool engineered to separate people from their money, but with Morgan Stanley estimating that anything between $30 to $40bn is going to be invested in these products over the next 12 months there is bound to be a lot of interest in these vehicles.

So what are these new fangled products that have sparked a tidal wave of interest from institutional investors, while the retail market waits with baited breath?

If you were to talk to those who have already fallen under the spell of 130/30 they would tell you that they offer investors greater potential returns without increasing your risk.

Contrary to what the pessimists may say about 130/30 they do actually offer exposure to both sides of the market, by allowing managers to both long and short to an extent, giving the manager the freedom to be both bullish and bearish on different sectors in the market by allowing them to go 30 per cent in short positions or 130 per cent long.

Should the manager choose to go short, those stock sales can then be combined with the initial investment to make an extra 30 per cent in long position – making up the 130 side.

For that notion alone, I would tend to follow the optimists view. It can offer the best of both worlds by allowing a manager a type of conservative aggression as, borrowing 30 per cent can be extremely beneficial if the shares go up. The only downside I see is why some fund managers would be keen to go 30 per cent short, when they may as well run a hedge fund and not be so constrained.

Offering a half way house is logical as it should have scope to attract sufficient interest from both sides of the fence. As for the managers, well, it can serve as a vital experience for those who do eventually want to move from long-only into the full long/short world. But experience is the key, investors are beginning to get wise to the number of ‘me too’ offerings that will inevitably hit the market. Anything that has been wrapped in shiny paper will quickly be unwrapped so the importance of substance, namely a strong manager who knows the ins and out of running these funds and outperforming, is going to be the deciding factor over a specific fund succeeds, regardless of whether the idea becomes more than a market fad.


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