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130/30 Guide

 

Concept

It may be useful at this stage, pace all those readers who are already familiar with them, to describe what we mean by some of the terms we are using.

Long-only, going long: until the UCITS regime the only permissible model for mainstream UK investment funds, this requires managers to identify and invest in securities that are likely to rise in value in the future. Shorting, going short: the principle underlying this practice is that a seller sells a security, now, for delivery to a buyer at a future date. The seller does not own the security at the time of contracting, but receives the sale proceeds, and is betting that its value will fall over time. At the appropriate point, the seller acquires the security at a price lower than the proceeds it received at inception, and delivers it to the buyer. The seller retains the price difference as profit on the transaction.Typically, in the 130/30 version of this practice, the fund borrows securities that it deems overvalued, either directly from the issuer or from a broker that deals in this form of derivative. The borrowed securities are sold at today's market value, and the proceeds are put to use. When it is time to return the borrowed securities, they are re-purchased at the lower future market value and delivered back to the lender.

Leveraging: in this context, the practice of adding assets that the fund does not own to those that it does, to boost the overall pot available for investment.

So, the innovative aspect of 130/30 funds is that they take one step beyond traditional long-only trading models, and use a shorting element in the mix to leverage up the returns that might otherwise have been achievable.

This combined long/short investment strategy borrows something from the hedge fund approach, and some observers have dubbed the 130/30 model 'hedge fund lite', but this is not the case at all. When it comes down to it, the derivative element is only there to supply extra muscle to the overall fund, and the aggregated pool is still run on a long-only basis.
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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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