Investments, Case 1:
1. For this first question, we will start by describe the 130/30 fund structure and then talk about advantages and disadvantages relative to a long-only strategy, but also about the operational complexity of these strategies and the main risks.
A 130/30 fund structure allows the fund manager simultaneously to hold both long and short positions on different equities in the fund. Then, using this strategy, a manager can choose to buy a stock in order to make money and also sell a stock to make money whereas in a classis strategy the manager can only sell a stock to not lose money. To be more precise, a 130/30 fund structure will be long stocks worth 130% of the portfolio while shorting 30% of investor assets in the fund.
Concerning the advantages and disadvantages of a long-only strategy, one of its main points is that a manager might not be able to increase its fund's revenue. Using leverage, the 130/30 fund structure can short-sell as we explained before which means that a fund manager who would like to outperform the benchmark will just have to bet in a positive and negative position and will then improve its profits. Hence, one of the main advantages of this strategy is that fund managers can do more profits and have a higher return than a long-only strategy. It is also important to mention that we have higher costs than in a classic strategy while, for instance, betting in both positive and negative view is more expensive. Indeed, high costs are the main disadvantage of the 130/30 fund structure strategy as when you need to pay fees to the brokers (when taking short positions), total taxes are higher than in a classic strategy even if it's possible to recover it in some cases and also a higher turnover while we have a high intensity of buying and selling stocks are some examples of this more expensive strategy. Nevertheless, a good fund manager must be able to get higher returns using the 130/30 fund structure and then make...
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