The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

130/30 funds - a new middle ground?

Andrew Collins

Fortis Prime Fund Solutions

Q3 2007



Commentators on the alternative and traditional asset management industries are predicting an explosion in the demand for so-called 130/30 funds in the coming months and years. So what are they and what opportunities and threats do they present? Will these products provide the impetus for investors who were hitherto not invested in alternatives, to begin to make significant allocations to hedge fund type strategies? Could these products eventually prove to be a substitute for hedge funds?

What are 130/30 funds?

130/30 funds are similar to long-only funds to the extent that they build a portfolio as normal, allocating 100% of NAV to long positions. They differ, however, from traditional long-only portfolios to the extent that they then short sell securities to the value of 30% of NAV. The proceeds from the short sale are then used to acquire additional long positions, thereby bringing the total exposure to 130% long and 30% short. The 130/30 product provides market exposure or “beta” but also enables the fund to generate additional “alpha”.

One other fundamental area of difference between 130/30 funds and traditional long-only funds is in relation to the fees charged by 130/30 funds. In a recent report, Merrill Lynch indicate that fees charged by 130/30 funds are higher than those typically charged by long-only funds. Where a typical US long-only manager will charge 30-50 basis points management fee, a 130/30 can typically charge 60-100 basis points. To date, there is no evidence to suggest that even fundamental 130/30 managers will be able to charge performance fees along the lines of those charged by hedge funds.

Who is launching these products and where is the demand coming from?

It is estimated that the industry is in the region of $50bn - $60bn and, it would seem, is growing at a significant rate. The current demand is coming from pension funds and, to a lesser extent, other institutions. It is likely, however, that these products will become increasingly appealing to retail investors in future, particularly given that they can be offered within a UCITS structure. The common interpretation of UCITS rules is that they cannot short sell in a physical manner. However, under UCITS III, they are permitted to short through the use of synthetic instruments, such as options and contracts for difference. Now that funds established under UCITS III rules are afforded the opportunity to go short, thereby creating an opportunity for asset managers to devise more creative fund products, there is a clear pan-European target investor base for the 130/30 fund. State Street Global Advisors have recently been appointed to manage a £165m Global Equity 130/30 mandate (a UCITS compliant 130/30 product) by the Asda Group’s Pension Fund. The California Public Employee Retirement System plans to incorporate 130/30 strategies into its $53 billion international fixed-income portfolio.

Fund of funds managers too, rather than seeing these products as a threat, could actually embrace the 130/30 funds, with UBS having already launched a fund of 130/30 funds.

According to Pensions & Investments, Russ Kamp, chief executive of the global structure products group at INVESCO’s New York office, estimates that 20% of the money invested in US large-cap long-only strategies will move to short-enabled strategies over the next 10 years.

Other entities which have launched 130/30 funds include Fortis Investments, Axa Rosenberg and BGI, to name but a few.

What strategies are 130/30 managers running?

It appears that the existing funds are mainly running quantitative strategies and Pensions & Investments estimate that as much as 80% of these assets are in quant strategies and 20% are in fundamental long/short equity strategies. Pensions and Investments also state that JP Morgan is one of the main fundamental managers winning 130/30 mandates, running a total of $1.5bn in two different strategies.

Winners and losers

Clearly several groups are set to benefit from the proliferation of 130/30 products. Of course, assuming these products realise their potential, prime brokers will undoubtedly benefit from this new asset class, given that it opens a whole new market of possibly enormous size. According to Financial News, Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers, Morgan Stanley and UBS are all pursuing 130/30 mandates and no doubt competition for new mandates will be fierce.
There is a challenge of how these products can be best serviced by administrators. From the point of view of valuing these funds, it would seem that hedge fund administrators are best placed to provide this service. On the shareholder servicing side, however, as these funds begin to attract retail investors in large numbers, it is likely that traditional long-only managers will be better equipped to handle the shareholder servicing side of this business.

Existing investors in long-only funds stand to benefit through access to products which might not only be better able to manage their downside risks but potentially also offer investors better performance.


Long-only managers are undoubtedly witnessing that their investors are beginning to allocate, or are increasing their allocations, to hedge funds and this trend is set to continue. In this environment, the introduction of a product which incorporates a mechanism for generating alpha has got to be an appealing proposition for investors. There is, however, a real danger that managers with little or no experience in shorting will bring products to the market which underperform the market and not only fail to deliver alpha but also have a negative impact on the managers’ ability to produce beta. Of course, managers hitherto, purporting to be hedge fund managers due to their shorting capabilities (albeit that shorting may be used in an extremely limited fashion), could come under real pressure in an environment where 130/30 funds are producing comparable risk adjusted returns. Established hedge fund managers are not likely to suffer any major fallout from the proliferation of the 130/30 product and so long as they are demonstrating consistent superior performance, their products will continue to attract investors and performance fees and should not come under pressure.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking - SFT reporting & transparency
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
        3. REMIT
        4. Securities Settlement
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contacts
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites