'130/30' Funds Have Tough Time

Open-end "130/30" funds have been gaining traction in the industry, quadrupling in number last year.

A search for open-end 130/30 mutual funds in TheStreet.com Ratings database produced the accompanying table of 12 such funds. Because "130/30" is a generic term for funds with ratios of 110/10 through 150/50 mixes, the list also includes the RVS 120/20 Contrarian Equity Fund RCEAX.

The basic structure of such a fund is, conceptually, to invest 100% of assets in a specified market, such as stocks, and then short assets in that market valued at 30% of holdings. The proceeds of the short sales are then used to invest an additional 30% on the long side. Thus, the net exposure is 100% long.

If the managers are successful in picking the right long and short choices, investors will benefit from the leveraged long holdings as well as from the 30% in short investments.

In practice, it is common for such funds to achieve their 130%-long-30%-short postures using derivative instruments rather than long and short positions.

The popularity of 130/30 hedge funds prompted open-end mutual fund management companies to create nine of the funds in the adjoining list in 2007. The trio of pre-1997 funds are ING 130/30 Fundamental Research Fund(IOTAX Quote - Cramer on IOTAX - Stock Picks), which was launched in 2006; Natixis Westpeak 130/30 Growth(NEFCX Quote - Cramer on NEFCX - Stock Picks), which has been around since 1992 but assumed its current strategy in 1998; and the institutional Robeco WPG 130/30 Large-Cap Core International Fund(WPGLX Quote - Cramer on WPGLX - Stock Picks), which debuted in 2003.

All the funds focus on segments of the equity market except for the MainStay 130/30 High-Yield Fund(MYHAX Quote - Cramer on MYHAX - Stock Picks), where the objective of investing in low-rated bonds is indicated by its name.

The MainStay 130/30 High Yield Fund, however, is the only member of the group to have posted a positive total return for 2008 through the end of May. Of the 11 equity funds in the table, only four picked combinations of long and short positions that combined to produce returns better than the S&P 500 total return index's year-to-date posting of negative 3.95%.

Only two of the funds on the list have been in existence long enough to qualify for grades from TheStreet.com. Each currently receives a grade of D-, equivalent to a "sell" recommendation.

The lackluster returns are a possible reason why the open-end 130/30 funds have not achieved popularity much with investors. No funds in this category tracked by TheStreet.com Ratings have been offered so far in 2008, and the dozen funds on the nearby table have attracted only $362.1 million in total net assets.

OPEN-END "130/30" MUTUAL FUNDS
NAME, TICKER & TheStreet.com RATINGS GRADE	MIN. INITIAL INVEST.	TOTAL EXPENSE RATIO (%)	TOTAL NET ASSETS ($MIL) *	MAX. SALES CHARGE (%)	YR. TO DATE TOTAL RET'N (%)
Dreyfus Premier 130/30 Growth A (DTTAX) U	$1,000	1.60	2.9	5.75	-4.05
ING 130/30 Fundamental Res Fd A (IOTAX) U	$1,000	1.40	10.4	5.75	-6.23
Legg Mason Prt 130/30 US LgCpEq A (LMUAX) U	$500	1.51	6.6	5.75	-3.78
MainStay 130/30 Core Fund A (MYCTX) U	$1,000	1.50	50.9	5.50	-1.88
MainStay 130/30 Growth Fund A (MYGAX) U	$1,000	1.50	16.2	5.50	-3.15
MainStay 130/30 High Yield Fund A (MYHAX) U	$1,000	1.30	112.8	4.50	1.41
MainStay 130/30 International A (MYITX) U	$1,000	1.60	39.9	5.50	-4.44
Munder Small Mid Cap 130/30 A (MAMSX) U	$2,500	1.96	0.4	5.50	-3.16
Natixis Westpeak 130/30 Growth A (NEFCX) D-	$2,500	1.95	39.4	5.75	-4.31
Robeco WPG 130/30 Lg Cp Core Ins (WPGLX) D-	$100,000	1.40	15.4	0.00	-5.52
RVS 120/20 Contrarian Eq A (RCEAX) U	$2,000	1.85	47.8	5.75	-5.22
RVS 130/30 US Equity A (RUSAX) U	$2,000	1.50	19.4	5.75	-8.05
S&P 500 TOTAL RETURN INDEX					-3.95
* Total net assets of all classes for multi-class funds. Source: TheStreet.com Ratings & Bloomberg - Data as of 5/31/2008. For an explanation of our ratings, click here.