130/30 investment strategies: hedging in a classroom setting.
Taylor, James J.
INTRODUCTION
The typical investor buys and sells individual investment positions
with the expectation of buying into a position "low" and then
later selling the position "high." This approach to investing
is called buying and selling "long." The investor purchases a
stock or bond anticipating something will cause the investment to
increase in value. Sales at a company could be increasing faster than
expected. New and better company managers may have been brought on
board. Interest rates in the economy could go up--or down. Many reasons
can account for an investment to change in value.
The investor who thinks "long" is looking to get a
positive return on each individual investment. With experience, such
investors recognize that not every investment chosen will go up in
value. Such investors go "long" with the expectation that
enough right decisions will ensure overall positive returns. To deal
with the risk of something unexpected happening, "long"
investors will diversify their investment portfolio by buying several
kinds of investments, such as stocks and bonds, and by buying
investments from a variety of business types such as consumer goods,
consumer durables, and consumer finance.
The hedge fund investor approaches investing differently. Instead
of buying at one time and selling at another, the hedge fund investor
will carry out two related investment actions at the same time. Here the
expectation is that the investor will be buying one investment and
selling another related investment in such a way the two investments
counterbalance each other (Markese, 2006; Reichenstein, 2004). This
becomes a different way of dealing with risk. The "long"
investor diversifies a portfolio to deal with risk. The expectation is
that the same negative outcome will not affect a whole diversified
collection of stocks and bonds. The hedge fund investor deals with risk
by acquiring two related investments at the same time. This is done in
such a way that if the first investment goes down in value, the second
investment will go up in value. The opposite also intended. If the
second investment goes down in value, the first investment will go up in
value. On the surface at least, it seems that some form of hedging must
be the perfect investment strategy.
INVESTMENT TOOLS USED IN HEDGES
Many different investment tools can be used to help build a hedge
even though the use of any particular tool does not automatically create
a hedge. The tools are described here to prepare the reader to
understand some basic hedge situations.
The first tool that can help build a hedge is the use of
"margin." "Long" investors put up their own money to
buy stocks and bonds and create their own portfolio. An investor with
$100,000 that is available for investment and using her/his own money
can only purchase $100,000 of stocks and bonds. However to have more to
invest, an investor can borrow additional money from a broker. The
current rule is that ordinary investors, you and I, can borrow up to 50%
of the total cost of an investment. That means that an investor with
$100,000 can purchase up to $200,000 of stocks and bonds. When the
investments purchased on margin go up in value, the investor's
return is significantly increased. At the same time when the investments
purchased on margin go down in value, not only will the use of borrowed
funds significantly decrease the investor's return, the investor
will be subject to a margin call as the amount of the loan from the
broker is adjusted to the now reduced value of the investment (Gannon,
2005). In the "With Margin" column of Table 1, the loss of 25%
of investment value means the investor has to come up with an additional
$25,000 because the broker can only loan 50% of the reduced value of the
investment.
The use of margin not only has a significant impact on investment
return; it also increases the cost of investing as the broker will
charge interest on the loan. Still, despite the negatives, when there
are ways for reducing the effect of a downturn in investment value, the
use of margin would be an attractive option (Little, 2009; "What
does," 2009).
The next tool that can be used in hedge fund investing is the
"short sale." In a "short sale, an investor borrows stock
from someone else, typically a stock broker, and immediately sells the
stock. At first it might seem strange to be selling a stock that you do
not own but it makes sense. "Long" investors are buying stocks
that they think will go up in value. What does an investor do who has
become convinced that a company is poorly managed and will probably go
down in value? The "short" sale is the answer. In a
"short" sale, investors sell borrowed stocks they do not own,
with the expectation that some time in the future, they will be able to
buy back the stock at a cheaper price and return the borrowed shares to
the broker. Of course brokers charge for the privilege of borrowing the
shares and they keep track of the stock that has been borrowed. If the
stock unexpectedly goes up in value, the broker will ask for the
investor to put up more money in reserve. In this way a "short
sale" is limited similar to the way the use of margin is limited.
A set of related investment tools that can be used to help create
hedges, are the "puts" and "calls" used in option
trading. A "put" is the purchase of the right to sell an
investment at a specified exercise price on or before a specified
expiration date. A "call" is the purchase of the right to buy
an investment at a specific price on or before a specified expiration
date. Rights do not have to be exercised. They represent only the option
to exercise a right. The owner of a "put" or a
"call" can either ignore the option or enforce the option
depending on whether it is an advantage to do so. Options cost much less
than the actual investment. A "put" can be used to protect
against a possible fall in the price of an investment you already own. A
"call" can be used to protect against a possible rise in the
price of an investment you have already sold short. Buying puts and
calls increases the cost of running a portfolio but under certain
circumstances they can protect values in a portfolio.
A final set of tools used for hedging are the buying and selling of
"futures." Originally future markets were associated with
buying or selling the promise to deliver at a specific price on a
specific date, a commodity like corn or wheat. Farmers used future
markets to guarantee themselves a firm price on wheat that had not yet
been harvested. Millers used future markets to guarantee a base price on
wheat that had not yet been delivered.
A future transaction is called a "forward contract." Each
forward contract has a buyer who makes the promise to receive certain
goods at a specific price and date, and a seller who makes the promise
to deliver the goods at that same price and date. Interestingly, at the
time the promise is made, no money exchanges hands. Money, if it is to
change hands at all, will change hands on the date delivery is made or
when the contract is reversed. Unlike option contracts which do not have
to be carried out, a forward contract has to close either with the
reversal of the original contract or with delivery. Since the primary
purpose of a future contract is to nail down an acceptable price to the
buyer or the seller, the great majority of future contracts are reversed
rather than delivered. Pricing differences between the current market
price of the investment (called the spot price) and the price in the
contract are dealt with at the reversal. Again since holding a future
sale or purchase is cheaper than holding the underlying investment, such
transactions can be used to protect against unwanted rises or falls in
portfolio values. In the last few years the future markets have
incorporated the buying and selling of many more kinds of investment
futures. Now such markets are growing faster than existing markets in
which stocks and bonds are sold.
These tools have been around almost since the development of the
first stock markets. However it is important to recognize that the use
of any of these tools does not automatically turn an investment into a
hedge. A hedge is created when an investment manager carries out two
counterbalancing actions at the same time. One of the simplest hedges is
the use of arbitrage or the "convergence" hedge. Suppose an
investor knows that the same security is sold in two different markets.
Suppose further that the investor finds out that the security is priced
at $20.00 a unit in the first market and at 19.90 a unit in the second
market. The investor could sell short a large number of units of the
security on the first market and buy a large number of units of the
security on the second market, making a profit on the small difference
in the price in each market. The investor would have to act quickly. The
short sale of the security on the first market will indicate increased
supply causing the price of the security to go down. The purchase of the
same security on the second market will indicate increased demand
causing the price of the security to go up. In addition other investors
would be trying to earn a profit the same way. Convergence of prices on
the two markets will happen very quickly.
With the advent of high speed computers and online connections,
such simple convergence hedges can rarely be carried out by individuals
any more. Software programs identify small pricing differentials between
markets and take advantage of them almost instantly. The example also
illustrates that most hedges are carried out at small pricing
differences. This means the profit potential in any hedge is small
unless large amounts of money are involved or the trader can increase
leverage by being allowed a large margin. Whereas a regular investor can
only purchase stocks with a margin of 50%, commodity and future margin
accounts have been set up with margin rates of 5 to 15%. An investor
with $100,000 can set up a 10% margin account that will allow the
investor to purchase a million dollars in futures, providing a
significant increase in profit potential. For example a ten percent gain
on $1,000,000 will provide a 100% gain on an original investment of
$100,000.
The basic components of a hedge situation are now identified.
1. In a hedge an investor tries to exploit special knowledge about
how two different investment situations may be related.
2. In a hedge, an investor structures both the purchase and the
sale so that investment risk may be reduced.
3. With the reduction of risk, it makes sense for the investment
manager to use a high level of margin or leverage to increase return.
While opportunities for such simple hedges are now rare, the
existence of a large variety of different kinds of markets and
investment situations means that there are many other kinds of hedges
that have been developed. However such situations are no longer simple.
They are instead dependent on far more complex financial relationships.
The problem is that hedging has become so complex this author has found
it difficult to explain such opportunities in an ordinary,
comprehensive, upper division undergraduate investment course. The
complexity of the subject matter makes it difficult to find useful
examples of hedging.
THE TREASURY BILL FUTURES HEDGE
The first time this author introduced hedging in an undergraduate
investment course, he used as the class example the hedging of Treasury
Bill futures. This was a type of convergence hedge based on the fact
that T-Bill futures were priced at a slightly greater discount from par
than real T-Bills themselves (Lowenstein, 2000). This was true even
though when each matured, it returned the exactly the same amount of
money. One possible explanation would be that the market considered a
T-Bill future to be slightly less liquid than a T-Bill. In a simplistic
example of this financial situation, an investor would purchase a T-Bill
future with a par value of $100,000 and at the same time borrow a real
T-Bill with a par value of $100,000 from a broker and sell it short.
Because a T-Bill future was considered to be slightly more risky and
less liquid than a real T-Bill, the future would be sold at a slightly
greater discount from par, providing a slightly higher effective
interest return. See the example in Table 2 to follow the steps in the
process. When both the T-Bill Future and the T-Bill matured, the
investor would use the proceeds from the matured real T-Bill to pay for
the T-Bill future. The net gain in the example was $121.78 which works
out to about V2 of 1% interest. While that kind of return on $100,000
does not sound exciting to the average investor, the ability to increase
return on T-Bills by that amount would be considered significant..
However because the amounts are very small, it requires a use of large
amounts of margin to make the process economically viable.
The example includes neither the transaction costs nor the cost of
borrowing the T-Bill from the broker. These would reduce any gain.
However the central question is what underlying value is there in doing
this? The quick answer is that the process nails down an additional
profit of $121.78. Closer reflection however shows that a long investor,
the investor who pays the full amount of the investment, can always
invest in T-Bill futures at the higher discount and hold them to
maturity. This also ensures the additional return of $121.78 with less
complexity. On the surface it would appear that the investor using such
a hedge would be creating additional investment steps that would add
cost but would not increase return. To fully understand what's
happening, the analyst must realize that to make a really effective
return in such a situation, the investor has to create very large
amounts of margin by using the cash from the short sales to increase the
amount available to purchase T-Bill futures. The biggest source of risk
when investing in fixed income securities like T-Bills, is the risk of
interest rate changes in the market. In a naked or unhedged T-Bill
future position using large amounts of margin, a decrease in the market
interest rate before the bills have matured will cause the underlying
value of the bills to increase. This will create a margin call. Since
large amounts of money are in play, the call could be very large,
perhaps greater than the highly leveraged investor could afford. See
Table 3 for an example similar to Table 2, but incorporating an interest
rate increase during the period. See Table 4 for another example similar
to Table 2, but incorporating an interest rate decrease during the
period.
The real reason then for the use of a short sale hedge in the
situation described is to protect against large margin calls that are
created by the use of great leverage during a time when interest rates
change. How does the addition of a short sale hedge help protect the
investor in such a situation? As long as the general relationship
between the interest rate paid by T-Bills and the interest rate paid by
T-Bill futures is similar, no matter whether interest rates go up or
down, the investor will gain on the overall set of transactions. In
addition the risk of this kind of hedge is limited by the fact that
there will always be convergence in price when the T-Bill and the T-Bill
future mature. Table 4 shows what happens when interest rates go down.
A thoughtful reader can see that understanding even a simple hedge
can become very complex and challenging especially as margin and
leverage are incorporated. Success with a simple hedge also often
requires the use of more complex investment relationships. Despite the
complexity, student interest in hedging has increased. For a while
hedging was seen as the ideal way to make money from investing. With the
failure of the Long Term Capital Management hedge fund and other hedge
funds (Lowenstein, 2000) and the Madoff Ponzi scandal, this instructor
has found that students have developed a kind of negative interest in
hedge fund investing. However students still need the opportunity to
understand the three basic elements of hedge fund investing: (1) a
special knowledge about the relationship between two investment
situations; (2) the use of simultaneous buy and sell transactions to
reduce investment risk: (3) and the use of increased leverage through
margin accounts. A fourth (4) instructional element is also valuable:
learning how hedges can go bad.
THE 130/30 INVESTMENT STRATEGY
In a search for a simpler way of teaching students about the
complex subject of hedging, the instructor studied the 130/30 investment
strategy. An investor using a 130/30 investment strategy divides the
stocks of interest into two groups. One group is of low quality stocks
expected to fall in value. The other group is of high quality stocks
that are expected to rise in value. Depending on the inclination and
expertise of the investor, the choice of stocks for each group may be
carried out by personal analysis or by going to places like Morningstar,
the Motley Fool, or Yahoo Finance and choosing from lists of best and
worst stocks found there. In the instructor's experience, most
students use a combination of the two approaches. Then using a virtual
stock market game, the student sells short an amount that represents 30%
of the available investable funds and invests long 130% of investable
funds.
In the example provided in Table 5, the investor starts with
$100,000 of investable funds. Selling short $30,000 of low quality
stocks, now gives the investor a total of $130,000 to invest. The
investor takes that $130,000 and uses it to purchase $130,000 of high
quality investments. When the investor is finished, $160,000 of
investments are at risk. Stocks worth $30,000 are expected to go down in
value and stocks worth $130,000 are expected to go up in value. Table 5
provides an example of such a 130/30 hedge approach.
There is no requirement that the investor using this kind of
strategy keep the ratio at 130/30. A more conservative investor can use
a 120/20 ratio. A more risk inclined investor can use a 140/40 or even a
150/50 ratio. What has happened is that the investor has added leverage
to the portfolio and has simultaneously sold short one class of
investments while buying another class of investments. Most importantly
the investor is using his/her best knowledge about how low quality
investments are expected to relate to high quality investments. Finally
a 130/30 investor could easily cover any margin calls on the short
sales. Because of the reasonable short sale amount, margin calls can be
covered by limited sales of the high quality investments.
The 130/30 investor would seem to have almost all possible future
situations covered. The expected as well as most desirable outcome is
that the high quality investments go up in value and the low quality
investments go down in value. In this instance the investor would profit
from both the sale and buy transactions. The investor would also profit
if the high quality investments go up in value and the low quality
investments also go up in value. Here the investor would profit from the
high quality investments and lose on the low quality investments.
However since more money was invested in high quality investments, the
investor would gain overall. Finally if both the high quality
investments and the low quality investments went down in value, the
investor would lose money on the part of the portfolio that favored high
quality investments while gaining on the low quality investments.
Overall the investor would lose less than with a purely long investment
and overall, the portfolio would be well positioned for the next market
recovery.
A review of Table 6, without using actual numbers, shows the
generally expected outcomes from a 130/30 investment strategy. The first
three situations work to the advantage of the investor. However the
alert reader will realize that the fourth situation has not yet been
discussed. In the fourth situation the value of the high quality
investments goes down and the value of the low quality investments sold
short goes up. While money would be lost, most investors would think
that a situation where losses would happen on both sides of the hedge
would be very rare. Further, a qualitative review of the expectations
from the 130/30 investment strategy shows that overall gains are
expected to outweigh overall losses.
To more fully illustrate the way a 130/30 strategy is designed,
Table 7 presents the differences in gains and (losses) under differing
market changes. Initially it may seem that there is little difference
between the expected outcomes of a long only investment strategy and a
130/30 investment strategy. However the person entering the hedge is
expecting that the relationship between the long investment and the
short investment will remain similar. As long as the net probability of
outcomes 1, 2, and 3 is more likely than outcome 4, the investor will
come out ahead. The investor is not expecting that at the same time good
stocks lose value and poor stocks lose value.
Students presented with a 130/30 investment strategy quickly
understand the components and are able to construct a portfolio using
that strategy. Students also recognize that it would even be all right
if such a portfolio returned less than a S&P500 index portfolio if
they can show that use of the strategy has reduced overall portfolio
risk. The 130/30 investment strategy has proven to be a good way to
introduce students to the three basic components of hedge fund
investing--(1) the need for a special knowledge about the relationship
between two investments, (2) the use of tools that allow creating
related buy and sell transactions at the same time, and (3) the ability
to use increased margin because the hedge has reduced risk.
The 130/30 investment strategy has also turned out to be an
excellent way to introduce students to one other aspect of hedge fund
investing. From 2004 to 2008, many 130/30 hedge funds were introduced.
They quickly became very popular because the investment story was so
compelling. Funds using a 130/30 strategy would increase return because
(1) they offered a way for a portfolio manager to act on knowledge about
poorly performing companies; (2) they allowed for overall risk reduction
in a portfolio thorough counterbalancing two different classes of
investments; and (3) given the anticipated risk reduction, they made
possible an increased use of leverage. Unfortunately in the summer of
2007 and again in 2009, many 130/30 funds reported unexpected losses
(Sakar, 2009; Wrighton, 2007). One explanation was that the fund
managers may not have always carried out the 130/30 strategy well.
Perhaps it was not so simple for an investment manager to just draw up a
list of poor stocks and good stocks.
Closer analysis showed a deeper and possibly more systemic issue.
Statistics tells us that one of the expected outcomes of a statistical
grouping is reversion to the mean. Investments in T-Bill futures could
be expected over time to have the return on T-Bill futures match the
return on T-Bills. This would be true because the very structure of
T-Bills was such that at the end of 90 or so days, the par value of the
two investments would match to the penny. In this case reversion to the
mean works to the advantage of the strategy.
The same reversion to mean can be true of a 130/30 investment
strategy. However, in this case, reversion to mean works against those
using the 130/30 investment strategy. In Table 6 the author glossed over
the situation where at the same time the high quality investments lost
value and the low quality investments gained value. Perhaps such
phenomena can be expected more often when seen as a type of reversion to
mean.
The choice of a set of high quality investments or low quality
investments is complex. Some high quality investments and some low
quality investments are fairly priced. These would not be expected to
change much in value. Some high quality investments are overpriced and
some low quality investments are underpriced. These would be expected to
revert to the mean. Some high quality investments are underpriced and
some low quality investments are overpriced. Both of these would move in
the desired direction, maximizing return. The point is clear. Not only
is hedging complex because it uses a set of complex investment tools
such as short sales and puts and calls. It is also complex because, like
all investing it requires the sustained application of a high degree of
disciplined intelligence to micro and macro issues--something that those
who advocate the theory of the random investment walk would say is not
possible over the long term (Malkiel, 2007). The good news is that
students, people who generally do not want to believe in random
investment walks, at least learn from the 130/30 approach that no
hedging strategy is entirely riskless.
REFERENCE
Gannon, J. (2005). Margin accounts: A double-edged sword. Journal
of the American Association of Individual Investors. May 2005.
Little, K. Margin trading: Not for beginners. Retrieved February 5,
2009, from http://stocks.about.com/od/advancedtrading/a/Martrade010305.htm
Lowenstein, R. (2000). When genius failed: The rise and fall of
Long-Term Capital Management. New York: Random House.
Malkiel, B. (2007). A random walk down Wall Street: The true tested
strategy for successful investing. New York: W.W. Norton & Co.
Markese, J. (2006). Hedging your portfolio with mutual funds.
Journal of the American Association of Individual Investors. June 2006.
Reichenstein, W. (2004). What are you really getting when you
invest in a hedge fund? Journal of the American Association of
Individual Investors. July 2004.
Sarkar, P. (2009, May 24). Investors abandon 130/30 strategies.
Investment News. Retrieved 7/12/2009 from http://
www.investmentnews.com/apps/pbcs.dll/article?AID=/20090524/REG/305249980
What does margin mean? Retrieved February 5, 2009, from
http://www.investopedia.com/terms/m/margin.asp
Wrighton, J. (2007). The long and short of 130/30. Institutional
Investor, 15.
James J. Taylor, University of Guam
Table 1: The Impact of Margin on Return and Cash Flow
No Margin
Amount Contributed by Investor 100,000
Limit on Amount Borrowed 0
Total Amount Invested 100,000
Value with 25% Gain 125,000
Gain (Loss) on Contribution 25,000/100,000 = 25%
Value with 25% Loss 75,000
Gain (Loss) (25,000)/100,000 = (25%)
Limit on Amount Borrowed 0
Margin Call 0
With Margin
Amount Contributed by Investor 100,000
Limit on Amount Borrowed 100,000
Total Amount Invested 100,000
Value with 25% Gain 250,000
Gain (Loss) on Contribution 50,000/100,000 = 50%
Value with 25% Loss 150,000
Gain (Loss) (50,000)/100,000 = (50%)
Limit on Amount Borrowed 75,000
Margin Call 100,000-75,000 = 25,000
All figures in the tables are in dollars ($).
Table 2: Hedging / Arbitrage of T-Bill Futures Interest rates
stay the same during the whole period
Sell T-Bill Buy T-Bill
Short Future
Amount received from short sale of one 98,765.43
borrowed T-Bill to be replaced in 90
days
Amount owed in 90 days (100,000)
Loss on Transaction in 90 days (1,234.57)
Price of T-Bill future (98,643.65)
Value of T-Bill future in 90 days 100,000
Gain on transaction in 90 days 1,356.35
Net Amount Gained 121.78
Effective annual interest rate 5.0% 5.5%
Annualized increase in return 0.5%
When such transactions are carried out
on margin, very little cash is put up
and the percentage return increases
significantly
Table 3: Hedging / Arbitrage of T-Bill Futures: Interest rates go up
during the process
Note: when, interest rates go up. the value of the underlying
security goes down
Sell T-Bill Buy T-Bill
Short Future
Amount received from 98,765.43
short sale of one
borrowed T-Bill to be
replaced in 90 days
Amount owed in 90 days (100,000)
Loss on Transaction in (1,234.57)
90 days
Price of T-Bill future (98,643.65)
Value of T-Bill future 100,000
in 90 days
Gain on T-Bill future in 1,356.35
90 days
Interest Rates Go Up in -- --
5 Days
Interim price of Goes Down
replacement T-Bill
Interim price of T-Bill Goes down; however the
future Investor still has to
pay the price agreed
upon when the T-Bill
future was purchased.
Interim Gain (Loss) on Gain (Loss)
transaction
Possible Margin Call No Yes
Possible defensive Buy T-Bill at Meet margin call,
actions interim price to relying on par value
cover the short convergence in 85 days.
sale, Use profit If profits from covering
to meet margin the short sale are not
call on T-Bill adequate, the investor
futures. will need to borrow
additional funds.
The investor is
protected in this
instance because of the
interim gain on the sort
sale and the defensive
actions available. The
general relationship
between the T-Bill and
the T-Bill future
remains the same.
Table 4: Hedging / Arbitrage of T-Bill Futures: Interest rates go
down during the process
Note: when interest rates go down, the value of the underlying
security goes up
Sell T-Bill Buy T-Bill
Short Future
Amount received from 98,765.43
short sale of one
borrowed T-Bill to be
replaced in 90 days
Amount owed in 90 (100,000)
days
Loss on Transaction (1,234.57)
in 90 days
Price of T-Bill (98,643.65)
future
Value of T-Bill 100,000
future in 90 days
Interest Rates Go -- --
Down in 5 Days
Interim price of Goes up
replacement T-Bill
Interim Price of Goes up; however the
T-Bill Future investor only has to
pay the contractually
agreed upon price
when the T-Bill
future was purchased.
The investor can
sell a T-Bill future
at the interim price
and use it to cover
the purchase of the
original T-Bill
future. Any excess
profit can be used to
help meet the margin
call.
Interim Gain (Loss) (Loss) Gain
on Transaction
Possible Margin Call Yes No
Possible defensive Meet margin call,
actions relying on par value
convergence in 85
days. If profits from
selling the T-Bill
future at the
interim price are not
adequate, the
investor will need to
borrow additional
funds.
The investor is
protected in this
instance because of
the interim gain on
the purchase of the
T-Bill future and the
defensive actions
available. The
general relationship
between the T-Bill
and the T-Bill future
remains the same.
Table 5: Using The 130/30 investment strategy
Transaction Investable Balance
Funds at risk
Initial amount available
for investment 100,000 0
30% short sale of low
quality investments 30,000 130,000 30,000
Purchase of high quality
investments (130,000) 0 160,000
Table 6: Expected Outcomes from a 130/30 investment strategy
High Quality (HQ)
Investments
Amount of Portfolio 130,000
Percent of Total Portfolio 81.25%
(1) Value of HQ goes up, LQ goes down ++
(2) Value of HQ goes up, LQ goes up ++
(3) Value of HQ goes down, LQ goes down -
(4) Value of HQ goes down, LQ goes down -
Low Quality (LQ)
Investments
Amount of Portfolio 30,000
Percent of Total Portfolio 18.75%
(1) Value of HQ goes up, LQ goes down +
(2) Value of HQ goes up, LQ goes up -
(3) Value of HQ goes down, LQ goes down +
(4) Value of HQ goes down, LQ goes down -
++ or + = the investment goes up in value.
-- = The investment goes down in value.
Table 7: Gains / (Losses) Under a Variety of Market Changes
Long only 130/30
Investment Investment
Strategy Strategy
Capital Amount at Risk 100,000 100,000
Additional Leverage 0 60,000
1. Long goes up 5%, Short goes down 5% 5,000 8,000
2. Long goes up 5%, Short goes up 5% 5,000 5000
3. Long down 5%, Short down 5% (5,000) (5,000)
4. Long down 5%, Short up 5% (5,000) (8,000)
Note: The 130/30 investment strategy takes into account
the effect of gains / (losses) in both the long and short position.
