130/30 Funds: The Optimal Investment Solution?
Document ID: 2007-732 (previously #13)
Published on: 30th September 2007
Author: Niall Cameron
130/30 funds (also known as short-extension or alpha-plus funds) allow managers to hold long and short positions whilst maintaining the overall net market exposure of the fund. By shorting stocks, the manager can potentially generate additional alpha by capitalising on both over - and under priced stocks. In this note, we use Monte-Carlo simulation to understand the potential performance of different short-extension funds. We illustrate various techniques to evaluate the portfolio dynamics and investigate how the short-extension structure can be implemented to leverage and optimise the manager’s abilities.
