130/30 funds: an enticing idea, but is it really worth it?
They’ve proved so popular in the US that they’ve already taken in more than $50bn of investors’ money. Now the 130/30 fund is set to make its UK debut.
While standard equity funds simply buy – or ‘go long’ in – stocks, 130/30 funds do that and more. They invest 100% of their money in the market, usually with the aim of tracking broader market movements, but then take a short position on 30% of the portfolio, betting on shares falling, usually borrowing against their long portfolio to do so.
The funds are being sold as an easy way for retail investors to access hedge-fund-style strategies without the high minimum investment. The head of retail at UBS, due to launch such a fund in the UK on 6th July, tells The Observer that a 130/30 portfolio gives the manager the chance to add more ‘alpha’ – the term used to describe the part of overall returns that are down to a fund manager’s decisions, rather than general market movements.
What he doesn’t say is that it’s also an opportunity to charge extra fees. They might not charge the exorbitant 20% performance fees that their hedge-fund cousins do, says Paul Petillo on the Market Oracle, but they do tend to charge about 2% more than standard funds. That’s a hefty chunk when you are already paying around 1.5% a year on a standard long-only fund.
What’s more, buying a stock is very different to shorting one, and there is
the potential that investors will get burnt as companies rush to get in on these new-fangled products. When you go long, you can only lose as much as you paid for a stock. But when you short, you can lose far more than your initial stake – prices can only fall to zero, but in theory, they can rise indefinitely. As John Authers wrote in the FT recently, these funds provide “more opportunities to make mistakes than with a long-only strategy… If the flood of offerings grows much greater, there is a real danger that managers without the necessary skills may be able to raise money.”
This goes to the heart of the problem. One of the main selling points of hedge funds has always been that their huge fees mean they attract the cream of fund management, people who are genuinely able to add value.
As Andrew Wilson of Towry Law reminds Daily Telegraph readers, most managers of bog-standard funds are unable to beat their benchmark index – so why should they be any better at running these riskier 130/30 funds? “This just seems to be another marketing-led initiative designed to part investors from their money.”
