The so-called 130/30 strategy, which has gained a lot of attention among mutual funds, is now being unveiled in an exchange traded fund.
If the term is unfamiliar, it means investing 100% of the assets of a fund and going short 30%, and taking the proceeds from those short sales to go long an additional 30%. The strategy is to put that extra 30% in stocks that may outperform a benchmark index and sell short shares that ought to lag the same benchmark. The goal is to add alpha, or outperformance versus an index. The new ProShares Credit Suisse 130/30 (CSM) will try to add alpha by buying an S&P 500 Index fund.
The index underlying the fund will overweight certain S&P 500 components and sell short others, based on a proprietary model constructed by Massachusetts Institute of Technology finance professor Andrew Lo and Pankaj Patel, director of quantitative research at Credit Suisse (CS - Get Report). As there's been a lot of volatility, there is money to be made. S&P 500 members Ford (F - Get Report) and Micron Technology (MU - Get Report) have surged 161% and 111% this year, respectively, while Eastman Kodak (EK) and Citigroup (C - Get Report) have tumbled 51% and 53%.
As the benchmark index for the fund is the S&P 500, it owns (or shorts) only stocks in that index. Because of that, there isn't much to glean from individual stocks; the single largest short accounts for only 1.3% of the fund. The sector weightings are more interesting. Of the 30% short, 19% is technology.That's curious because the iShares DJ US Technology Index Fund (IYW) has risen more than 30% since the March stock-market low, compared with the S&P 500's 25% gain. The fund also has large short positions in financials, consumer cyclicals and materials. Given the quarterly reshuffle, the fund is subject to heavy shorting in those sectors (except financials, perhaps). Problem is, those industries typically lead recoveries, which could be setting up the fund to lag. That all depends, however, on the shorting acumen of the process, and since it's proprietary, it boils down to faith in Lo and Patel.