130-30 Fund (Long/Short Fund)

A 130-30 fund is a type of collective investment vehicle, often a type of specialty mutual fund, but which allows the fund manager simultaneously to hold both long and short positions on different equities in the fund. Traditionally, mutual funds were long-only investments. 130-30 funds are a fast growing segment of the financial industry, with many new releases planned in 2008; they should be available both as traditional mutual funds, and as exchange-traded funds (ETFs). While this type of investment has existed for a while in the hedge fund industry, its availability for retail investors is relatively new.

A 130/30 fund is considered a Long-Short Equity Fund, meaning it goes both long and short at the same time. The "130" portion stands for 130% exposure to its long portfolio and the "30" portion stands for 30% exposure to its short portfolio.

The 130-30 funds work by investing, say, $100 in a basket of stocks. They then short $30 in stocks that they believe to be overvalued. Proceeds from that short sale are then used to purchase an additional $30 in stocks thought to be undervalued. The name reflects the fact that the manager ends up with $130 invested in traditional long positions and $30 invested short. A common strategy is to use a traditional index, such as the Standard & Poor or NASDAQ 100, and then rate the stocks comprising that index by a proprietary method; the top stocks would be held long, the bottom stocks short.