What Is the 130-30 Strategy?

The 130-30 strategy, often called a long/short equity strategy, refers to an investing methodology used by institutional investors. A 130-30 designation implies using a ratio of 130% of sta🌠rting capital allocated to long positions and accomplishing this by taking in 30% of the starting capital from shorting stocks.

The strategy is employed in a fund for capital efficiency. It uses financial leverage by shorting poor-performing stocks and, with the cash received by shorting those stocks, purchasing shares that are expected to have high returns. Often, investors will mimic an index such as the S&P 500 when choosing stocks for this strategy.

Understanding the 130-30 Strategy

To engage in a 130-30 strategy, an investment manager might rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. A manager will use a number of data sources and rules for ranking individual stocks. Typicallꦦy, stocks are ranked according to some set selection criteria (for example, total returns, risk-adjusted performance, 𝓀or relative strength) over a designated look-back period of six months or one year. The stocks are then ranked best to worst.

From the 澳洲幸运5官方开奖结果体彩网:best ranking stocks, the manager would invest 100% of the portfolio's value and short sell the bottom ranking stocks, up to 30% of the portfolio's value. The cash earned from the 澳洲幸运5官方开奖结果体彩网:short sales would be reinvested into top-ranking stocks, allowing fo🐠r greater eꦉxposure to the higher-ranking stocks.

130-30 Strategy and Shorting Stocks

The 130-30 strategy incorporates short sales as a significant part of its activity. Shorting a stock entails borrowing securities from another party, most often a broker, and agreeing to pay an interest rate as a fee. A negative position is subsequently recorded in the investor’s account. The investor then sells the newly acquired securities on the 澳洲幸运5官方开奖结果体彩网:open market at the current price and receives the cash for the trade. The investor waits for the securities to deprecia🌱te and then re-purchases them at a lower price. At this point, the investor returns the purchased securities to the broker. In a reverse activity from first buying and then selling securities, shorting still all🐠ows the investor to profit.

Short selling is much riskier than investing in long positions in securities; thus, in a 130-30 investment strategy, a manager will put more emphasis on long positions than short positions. Short-selling puts an investor in a position of unlimited risk and a capped reward. For example, if an investor shorts a stock trading at $30, the most they can gain is $30 (minus fees), while the most they can lose is infinite since the stock can technically i🦩ncrease in price forever.

Hedge funds and mutual fund firms have begun offering investment vehicles in the way of private equity funds, mutual funds, or even exchange-traded funds that follow variations of the 130-30 strategy. In general, these instruments have lower volatility than benchmark indexes but often fail to achieve greater total returns.