Enhanced alpha principle

A 130/30 (Enhanced Alpha Fund) invests 130% of its assets in a long portfolio and 30% of its assets in a short portfolio.

To achieve this mix, fund manager will, for example invest £1 million in a long portfolio of shares worth £1 million. The manager will then borrow stocks and sell them short, generating £300,000. They then spend this £300,000 on additional, long stocks. The net result is a portfolio worth 130% long and 30% short.

We should point out that fund managers can follow any combination of figures, within their defined parameters, that result in the portfolio maintaining close to 100% net exposure. 

Fully Invested

The strongest argument against short selling is that in the long run stocks go up, so it is prudent to be fully invested. However, with an enhanced alpha strategy, the fund is essentially 100% exposed to stocks and is therefore fully invested.

What's more, with a short portfolio the manager is able to profit from stocks that fall as well as rise.