PT  - JOURNAL ARTICLE
AU  - Edward K. Tom
AU  - Sveinn Palsson
TI  - Trading 130/30s in Volatile Markets
DP  - 2008 Jun 20
TA  - Special Issues
PG  - 220--235
VI  - 2008
IP  - 1
4099  - https://pm-research.com/content/2008/1/220.short
4100  - https://pm-research.com/content/2008/1/220.full
AB  - Since the onset of the subprime crisis, a number of 130/30 managers have been noticing an unexpectedly high degree of dispersion between the returns of their 130/30 portfolios and their benchmarks. While a number of these funds have outperformed, confusion has arisen as to why a strategy that is touted as being “net 100% long with a net beta of one” can deviate so widely from its benchmark.The reality is that although some 130/30s do indeed have true beta one characteristics, most do not. In fact, most 130/30s, as they are commonly implemented, resemble a strategy that hedge funds refer to as “synthetic dispersion.” And it is this synthetic dispersion overlay that has been largely responsible for the alpha (or lack of) that many 130/30s have garnered to date. This artcle explains the role volatility, dispersion, and correlation play in 130/30 strategies. Furthermore, it introduces a framework 130/30 managers can use to adapt best practices developed by volatility arbitrage and market-neutral hedge funds to mitigate risk and generate alpha in volatile markets.