Since 130/30 or “short-extension” funds entered the investment lexicon over 3 years ago, it has generated considerable debate.  While industry commentators derided the strategy in the media, academics remained steadfast in their belief that short extension strategies have merit.

So what gives?  What is it in the academic literature that could support the existence of value in a strategy whose brief history seems to provide empirical evidence to the contrary?  Critics say that short extension strategies face some operational headwinds that long-only funds do not – that shorting is not simply the “reverse of long investing”.

The truth is that 130/30 funds are both academically sound and operationally-challenged.  An article by Morningstar published today provides a relatively dispassionate overview of these factors that stand in stark contrast to the typical critique of the 130/30 concept based solely on performance.  In it, Morningstar’s Nadia Papagiannis highlights several unique challenges faced by 130/30 managers: More…