Understanding 130 30 Funds

The investments known as 130 30 mutual funds utilize both long and short positions in order to increase the possible returns for investors. With this type of mutual fund, the manager invests 130 percent of the fund's assets into long positions and 30 percent into short positions. These funds have become very popular in recent years, and some of them have had good returns. Here are the basics of 130 30 funds. 

130 30 Funds

In order to make this work, the mutual fund has to borrow money to buy the necessary securities. To begin, the mutual fund puts 100 percent of its money into long positions on stocks. It borrows 30 percent of the money in the fund and uses it to buy short positions on stocks. It then sells shares of the fund to the public. With the money raised from selling shares, the managers buy another 30 percent in long positions. In this way, the fund ends up with 160 percent of its value invested in long and short positions. 

Increased Returns

With this type of investment, many people are lured in by the promise of exceptional returns. Since the fund is borrowing money to invest in the market on your behalf, it can increase the returns that it would ordinarily be able to get. In addition to this, it can increase the returns because it is taking short positions in part of the market. This improves the odds of making money because not only is the fund taking a long position on certain portions of the market, but it is also betting against other parts. Since parts of the market go up while others go down, this could be a way to make some nice profits.

Risk

Even though this type of investment can be beneficial, it can be risky. There is increased risk because the 130 30 fund borrows money to invest. This is essentially like investing with a margin account. If the trade goes in your favor, it can give you great returns. If the trade goes in the opposite direction, it can cause significant losses. With this type of fund, there are even positions in both directions. If both of those positions are taken in the wrong direction, it could cause the losses to increase substantially.

Costs

Other potential drawbacks of 130 30 funds are the costs involved. You have to be careful because the fund managers are generally buying and selling a lot. With this increase in transactions, the fund has to pay increased transaction costs to brokers. This might increase the returns, but it can also eat into the returns overall. If the fund is not performing well, these additional transaction costs can significantly lower the attractiveness of the mutual fund. Pay attention to the turnover ratio of the fund before getting involved.

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