Verdict Still Out on 130/30 Leveraged Funds

If you haven't heard much about 130/30 funds, which use leverage and are net long, you probably will soon.

While there aren't that many of them in the mutual-fund universe yet, a growing number of fund families are considering an offering with this type of structure.

A 130/30 fund invests 30% of its assets in a short portfolio, where the manager bets that those assets will fall in price. The cash received for selling the short portfolio, along with some potentially borrowed funds, is then used to increase the long portfolio -- where the manager expects asset prices to increase -- to 130% of assets. Hence, 130/30.

As an example of a 130/30 large-cap equity fund with, say, $2 million in assets, a manager would use those assets to purchase shares in companies in the S&P 500 or Russell 1000 indices, while at the same time shorting $600,000 in shares of other companies. With the cash received from the short sale and/or the use of leverage, the fund manager could purchase an additional $600,000 of shares. ...