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.

(A fund family could offer other leveraged net long portfolio structures, such as 120/20 or 140/40 funds, but any mutual fund that utilizes a leveraged structure is limited in its ability to borrow under the Investment Company Act of 1940.)

One could conclude that, given the leverage associated with a 130/30 fund, a fund manager who outperforms the market would likely enhance those returns with this type of structure. That of course assumes that the manager is good at picking long positions. However, since most of these funds are extremely new, they don't have much of a history from which to judge.

Of the 140 or so leveraged net long funds, the vast majority are unavailable to most of the public and are offered only through separate accounts or investment trusts, or to institutional investors. In fact, we found only five 130/30 mutual funds available, with only ( IOTAX) ING 130/30 Fundamental Research Fund (IOTAX) and ( BEAAX) UBS U.S. Equity Alpha (BEAAX) having a history that dates back to 2006.

The other three, ( MYGAX) Mainstay 130/30 Growth (MYGAX), ( MYCTX) Mainstay 130/30 Core (MYCTX) and ( MYICX) Mainstay 130/30 International I (MYICX) launched in the middle of last year.

Two additional funds, STI Classic International Equity and STI U.S. Equity 130/30 Funds, have pending listings.

Clearly, it's much too early to draw conclusions regarding the success of these funds.

Performance of 130/30 Funds
Click here for larger image.
Source: Bloomberg & Russell Investment Group

Performance thus far for the public funds has been hardly impressive. As illustrated in the table above, the five funds currently available have all posted spotty returns from June 30 to the present vs. the S&P 500, Russell 1000 and Russell 3000. The average return for these five funds was -10.49% year to date and -2.84% for the second half of 2007, respectively. That trails both year-to-date (-8.75%) and second-half 2007 (-2.38) returns for the S&P 500.

Moreover, assets under management are quite modest, with only one fund claiming more than $50 million in assets. Investors may want to remain on the sidelines for the time being, at least for the public variety, while these funds post a more extensive track record.

Lawrence Petrone is director of research for TheStreet.com Ratings. Prior to his current position at TheStreet.com Ratings, Lawrence was a partner and the senior supervisory analyst at America's Growth Capital, where he was responsible for managing their research team and contributing technology research. Prior to joining AGC, Lawrence was supervisory sell-side analyst at Fidelity Capital Markets and DE Investment Research, a portfolio analyst at Fidelity Management & Research Company and a senior corporate analyst at The Boston Company. Lawrence was also portfolio manager and founder of a small-cap long/short hedge fund. Lawrence is a Chartered Financial Analyst, and has a B.A. in History and Education from Gordon College, and a M.Ed. from Boston College.

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