The word in the fund names
Enhanced, defined
Permission to hold less than zero.
The limit
Zero is the floor
A fund that only owns things is called long-only, and the strongest position it can take against a company is to own none of it. And because a fund is often judged against its index, that position is only as big as the company’s weight in the index. Own none of a company that is half a percent of the index and, even if it fell to nothing tomorrow, you would come out only half a percent ahead.
A long-only manager who expects a stock to lag can act on that view only up to the stock’s index weight, which for most of the index is close to zero. For roughly 85% of the global index, the ceiling sits below one tenth of one percent.
24%
of the global index sits in its 8 largest companies.1
85%
of constituents weigh under 10 bps; a long-only fund cannot take a meaningful position against them.1
The other half
The short side is the same research, used fully
Shorting carries the same view past that floor. Knowing which companies may lag is worth as much as knowing which may lead, so the structure exists to use both halves of the work.
Acting on the same opinion past zero changes the mechanics. A short must borrow the shares it sells, and a position that rises grows in the book rather than shrinking, so the shorts are sized small and managed as their own discipline.
A short borrows shares, not money. The cash raised by the sale is fully reinvested in the long side, so the portfolio stays in the market and the short sale is not a call on which way the market will move. Net exposure to the market stays near $100, and the benchmark is conventional. The structure changes what the manager can do with research, not the yardstick an advisor reviews it by.
The three jobs
What each fund asks of the short side
The growth fund puts its ranking to work at both ends. Companies the research ranks lowest are sold short, and the proceeds go into more of the ones it ranks highest. The shorts are selections in their own right, not just a way to fund the long side.
The dividend fund selects and sizes its shorts to cushion the portfolio when markets fall. Its design leans on the tendency of weaker companies to fall further in a decline, so the shorts gain while the market falls and hand back part of the loss. However the same positions can give that ground back when weaker companies rally.
The income fund shorts bonds rather than shares. Owning a corporate bond means carrying two risks at once, the borrower and interest rates; shorting government bonds cancels most of the second, so what mainly decides the outcome is the manager’s judgment of the borrowers.
None of this runs itself. The short positions are monitored and rebalanced daily, with limits on volatility, liquidity and the borrowed shares behind each position.
The arithmetic
$130 long, $30 short, $100 net
For every $100 invested, $30 is set against the companies the research ranks lowest, and the proceeds go back into the ones it ranks highest. That puts $130 into long positions and leaves $30 short, so $160 is working and nothing sits idle.
Because the combined long and short positions add up to the original $100 investment, your net exposure to the market stays close to what you put in. What changes is how much of the research gets to matter.
What the word does not mean
Enhanced does not mean better returns
It means more of the manager’s judgment is put to work. Whether that judgment pays is a separate question.
Going below zero changes what being wrong costs. A manager who simply avoids a company and turns out to be wrong misses a gain; a fund that is set against that company takes a real loss instead. That holds in the income fund too, where what is sold short is bonds rather than shares.
That cost is ours as well. When the funds open, the principals intend to invest in them on the same terms as anyone else: the same series, the same price, the same fee.