New York Times- CAN you hedge a hedge fund?<\/p>\n
An investment currently being marketed to the rich is trying in essence to do just that, and the approach is bound to be offered to the rest of us soon.<\/p>\n
Often referred to as 130\/30, the strategy calls for investment managers to buy undervalued stocks, while simultaneously shorting \u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u20ac\u009d that is, selling borrowed shares \u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u20ac\u009d those they believe to be overvalued.<\/p>\n
This is, of course, what many hedge funds do. The difference here is there is a limit on how much the manager can short. The percentage is typically capped at 30 percent (which gives the strategy its name.)<\/p>\n
The advantage of this approach is twofold, John Ferry writes in Worth<\/span>.<\/p>\n First, by permitting managers to \u00c3\u00a2\u00e2\u201a\u00ac\u00c5\u201cgo short,\u00c3\u00a2\u00e2\u201a\u00ac\u00c2\u009d it allows them to profit from their ability to spot a stock that they think is going to fall in price. Most investment strategies restrict asset managers to going long, that is betting that an investment will increase in value.<\/p>\n Second, money generated by shorting is used to buy additional shares of stocks the manager believes will rise.<\/p>\n Here\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2s one way 130\/30 could work: The manager borrows shares he doesn\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2t own, and sells them, using the proceeds to buy stocks he believes are undervalued.<\/p>\n He hopes to make money in two ways: The stocks he buys go up in price and, if the stocks shorted go down in value, he makes money there as well. That happens because when it comes time to return the shares he borrowed, he can replace them with shares that cost less, profiting from the difference.<\/p>\n As always, success in this strategy will occur only if the manager knows what to buy and sell and when.<\/p>\n