A Homemade 130/30 Investment Strategy: A Longer-Term Perspective

by: Daniel Moser

Recently, Seeking Alpha posted a blog article of mine that served as a quasi product review of the Credit Suisse 130/30 ETF (NYSEARCA:CSM) as well as a homemade alternative ETF strategy that essentially replicates the constraints of a 130/30 investment strategy without actually short selling any securities. A few readers requested that I expand the time horizon of analysis to see how such a strategy would have performed over a longer time horizon, so that is exactly what I have done.

Just so everyone is on the same page, a 130/30 investment strategy is a classic hedge fund strategy in which a portfolio manager invests 130% of their assets in long positions, using leverage/margin, while simultaneously short selling securities equivalent to 30% of their assets resulting in a portfolio that is net long 100%. I modified this approach by incorporating fixed income securities which tend to exhibit low or even negative Betas vs. the S&P 500 as a sort of synthetic way to short sell without actually short selling any security.

Since my prior analysis was performed over a 3 year time period and this analysis is for an 8 year time period, I decided to tweak my analysis a bit to reflect the cold harsh reality that no one really knows the future.


The time period for this analysis starts in November 2011 - which is constrained by the existence of the gold ETF (NYSEARCA:GLD). Additionally, I had to drop HYG from the investment opportunity set as it did not exist until sometime in 2007. The securities I incorporated into this analysis were TLT, LQD, SPY, QQQ, and GLD. My initial starting point was with the blind assumption that the weights using my prior analysis were the correct weights to build a 130/30 portfolio - which they were not, but you would not have known that ex-ante. Thus, I utilized those weights (with the incremental HYG holding weight placed in LQD) for the first 14 months of this analysis. Then, I adjusted the holding weights for the next 12 month period based on a targeting process with the constraints that in the prior 12 month time period, gross investments equal 130% and the portfolio Beta must equal 1.0 plus or minus ~5% (a.k.a. a backward looking calculation that is carried forward for 12 months). I re-adjusted the weights every 12 month period thereafter in this fashion. Additionally, I tended to use QQQ and TLT has the primary fly wheels to adjust the portfolio characteristics as they have the Betas furthest from 1.0 among the securities I utilized in this analysis. Hopefully this provides the necessary clarity to understand how I performed my analysis, but if it is still confusing just ask me and I can try and explain further.


Between 2004 and 2008, the performance gap of the 130/30 portfolio vs. the S&P 500 was negative 10% at its worst. But having said that, when the market got seriously hammered during the peak of the financial crisis, the value of $10,000 invested in the 130/30 portfolio bottomed out at a level 12% higher than the equivalent investment in SPY during that same time period.

Over the entire time period in question, the 130/30 portfolio has outperformed the S&P 500 by roughly 2% per year. This seems like a great opportunity to reiterate the value of compounding. If this same performance persisted into the future and an investor made an additional investment of $5,000 per year into this strategy, the results would look something along the lines of:

As you can see from the table immediately above, achieving an additional 2% return per year dramatically impacts the total accumulated wealth of an investment portfolio.

All in all, the 130/30 investment strategy is pretty interesting. It modestly underperformed the S&P 500 from November 2004 through November 2007, but the strategy has basically outperformed the S&P 500 from that point forward by using the process I laid out above. Although you cannot directly see it in this analysis, incorporating new securities for consideration (i.e. HYG, etc.) should further enhance the risk adjusted returns of this approach as there is more potential for added diversification and more flexibility with respect to staying true to the 130/30 principle constraints of gross investments of 130% with a portfolio Beta of roughly 1.


I am very passionate about asset allocation and portfolio strategies and I am always interested in new ideas to look into, so feel free to post comments with potential ideas or products that you think are worth looking into.

Thanks for reading and have a Happy New Year!

Disclosure: I am long SPY, QQQ, HYG, LQD, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.