Mutual-fund companies come up with "new ideas" all the time, but most don't gain any traction. So when Fidelity Investments joined the latest...
Mutual-fund companies come up with “new ideas” all the time, but most don’t gain any traction.
So when Fidelity Investments joined the latest trend earlier this month and opened a “130/30 fund,” it signaled that the newest fad in funds had gone big time. The question is whether this new flavor of funds has any role in the average investor’s portfolio, because the new genre of funds comes complete with hype about how a hedge-fund-like option can provide added diversification and protection against a down market.
In truth, the new funds sound more appealing than they are likely to be for most investors, and early returns don’t seem to justify the hype.
There are about two dozen funds — the latest being Fidelity 130/30 Large Cap (ticker: FOTTX) — available now that loosely fall into the new genre of funds. They have been described in any number of ways — including limited-shorting funds, enhanced-alpha funds, “hedge-fund lite” and more — but the 130/30 moniker is the one that seems to be sticking. The numbers are a description of what these funds do.
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While the percentages can vary, a 130/30 fund invests 130 percent of its assets in “long positions” — stocks in which the manager is betting the price is going up — and 30 percent in short positions, where the expectation is that the price will go down. In a short sale, the seller borrows stock and sells it on the open market, getting the cash from the sale; if the stock’s share price falls, the investor buys back the shares at a lower price, returns them and pockets the difference.
The proceeds from those short sales create the extra 30 percent of long exposure. On a net basis, the extra long and the short position cancel out and the fund can claim to simply be “fully invested.” For the average investor, however, the effect feels similar to a fund that uses leverage; the extra investment is there, theoretically, to turbocharge returns.
The idea is pretty simple: In a traditional fund, the manager can only put money on stocks that appear headed for takeoff; in a 130/30 fund, the manager gets to put all of their information to work, betting on crash landings too, a hedge that is particularly attractive in times like these, when the market is struggling to get any traction.
Clearly, performance is an issue, as the realistic expectation for a fund that can make bets in all directions would be that it can deliver superior performance in all market conditions.
An analysis by Investment Week magazine recently noted that 130/30 funds are “largely failing to outperform their long-only peers since they started coming to market last year.”
That’s a short time frame for the funds, but if they can’t deliver in challenging market conditions, investors should wonder if there’s a reason for these funds to exist. At the very least, investors should question whether these funds are worth taking a flyer.
Chuck Jaffe is senior columnist at MarketWatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.