Leverage, Volatility, and the Curious Case of 130/30 Funds

After the 130/30 boom, a few strong survivors.


Comparing their performance since then is difficult, because only three of the 10 pairs still exist. For what it's worth, though, the 130/30s posted a collective three-year return through July 24 of 8.84 percent, compared with 8.3 percent for the long-only equivalent and 13.3 for the S&P 500 index.

[See Should You Have Alternative Investments In Your Portfolio?]

To be sure, 130/30 funds have short track records dominated by a period of unusual volatility, so their disappointing performance so far doesn't necessarily discredit the strategy. What's more, defenders say, they are properly understood as modified long-only strategies, not some exotic insurance policy against poor management. Whether they fail or succeeds depends, ultimately, on the same sort of management skill that makes or breaks any long-only approach.

Be aware, though, that the shorting side of the strategy is a tricky, expensive business—requiring a talent for market timing not required of long-only managers—and one that few fund managers are experienced at it. Still, there are some relatively strong-performing 130/30s—the ones that have survived, needless to say. The two best performers from the Morningstar list above are the BNY Mellon U.S. Core Equity 130/30 (symbol: MUCIX), up an annualized 12.7 percent over the past three years, and the MainStay 130/30 Core (MYCTX), up 12.85 percent.

Should a typical investor take a dip into these funds, and if so how deep? Two things for sure: You need a tolerance for risk (the younger you are, the better) and you'll want to be sure you understand and believe in the strategy. "This is where you really have to buy into the whole [idea]," says Jeff Tjornehoj, head of Lipper Americas research. "It doesn't do you a whole lot of good to have a 130/30 as 10 percent of your portfolio. It has to be a core holding to make a difference."