Much of the debate about the 1X0/X0 equity strategy, typified by the 130/30 “flavor,” is tinged with marketing speak and relatively meaningless assertions about its “beta” characteristics, but there is something positive to be said about 130/30, that really can be said about it, regardless of where you come down on the marketing gobbledygook and alpha/beta debates.

For the uninitiated, a 130/30 equity strategy is just a fund or trading plan where they take 100% of capital and commit it to long positions in equities, then apply leverage or borrowed money or the implied leverage of futures to get an extra 30% long on other equities, and do the same to go 30% short on still other, different equities or equity futures. The 1X0/X0 nomenclature refers to different varieties, where the 30% may be replaced by 20%, 40%, etc., and believe it or not, some people like to spend time thinking about what the optimal percentage is. In TRPITS Part V, I looked at 125/25 and 100/33 varieties, for example.

Let’s just generalize the idea for a bit. Imagine you have two systems, “A” and “B.” Imagine further that these systems were both profitable over time, and weren’t highly correlated with each other, aside from the correlation that goes with both being profitable over time. These two systems could be Piotroski-style “value” and O’Neil-style CANSLIM, they could be trend-following commodity futures and “special situations” arbitrage, whatever. They could even be two different timeframes of the same idea, i.e. short- and long-term market timing. ANY two systems that meet the criteria of profitability and relative non-correlation.

Now it’s pretty obvious that combining them would end up reducing volatility and probably increasing CAGR. Any risk-adjusted measure of return would show improved results. This combination could be weighted 50/50, 67/33, or any other split. Let’s say … 81.25/18.75! That’s “A” having 13/16ths weight. Hmm, sound … familiar?

Now take this blended strategy, which we already know to be superior on a risk-adjusted basis to either “A” and “B” alone, and lever it up 1.6 to 1. Odds are, this puppy still outperforms either “A” or “B” alone, on a risk-adjusted basis, and certainly outperforms “A” on a total return basis.

130/30 is no exception to the above logic; it’s just a limiting case where “A” is long equities, and “B” is short equities. So there’s something there, the idea has merits, but not any more so than any OTHER blend of strategies, provided the strategies meet the conditions of profitability and relative non-correlation.

What’s the big deal about 130/30? Marketing. Retail investors should ignore the hype and debates about the strategy, and assess it, along with all other such ideas, on the merits of returns versus their predetermined absolute benchmarks.