Short extension structures go by a host of aliases, including active extension, alpha extension, leveraged net long, enhanced alpha, high-conviction funds, beta-one funds, limited-shorting funds, long-enhanced funds, active extension funds, hedge-fund lite, 1X0/X0 and 1XX/XX.

In our recent CutterBenchmarking™ survey on Alternative Investment Strategies, 42.8% of respondents said they already offer 130/30 funds, and 28.6% expect to offer them within three years. The majority of those already offering 130/30 funds have done so in reaction to strong client demand and because 130/30 funds represent an opportunity to improve returns on traditional strategies.

Traditional asset managers using quantitative investment methods are well-suited for adding these ”limited shorting” strategies to their portfolios. Because their quantitative models rank stocks from best (overweight) to worst (underweight), the projected underperformers thereby identify where they should be shorting the portfolio.

In a 130/30 fund, 130% of the fund's net asset value is invested long, with the extra 30% funded by shorting securities outright or by investing in derivatives. This structure supports "finding alpha" by holding favorable stocks long and holding stocks not in favor short, so that the fund achieves returns from both downside and upside market movements.

Decision Support and OMS
	Do your existing systems directly support or offer streamlined entry or import facilities for short sale transactions and for derivatives that may be required to implement the fund?
	Do your existing pricing feeds provide your portfolio managers timely P&L for the day’s activity and holdings?
	Do profit and loss calculations adequately consider the cost of borrowing in deriving values on short positions?
	Do your existing systems provide useful metrics on portfolios, including the separation of long and short positions and the ability to group holdings by strategy within a portfolio?
Compliance
	What look-through facilities do you have for position reporting or compliance review, where exchange traded funds or derivatives are used to achieve exposure to benchmark securities or to synthetically achieve shorting impact?
	What guidelines are in place to ensure that short extension funds allow shorting only within their allotted restriction (for example, 30% for a 130/30 fund)?
Valuation and Risk
	Do your existing valuation methods ensure fair pricing for all securities held in the 130/30 fund, including derivatives?
	Do you have adequate pricing feeds and data fields to track this information?
	Will risk evaluation consider discrete long and short positions, and also evaluate and report baskets of securities by strategy?
Fund Accounting
	Do the systems in place provide adequate functionality for short sale transactions and for derivatives?
	For hedge funds, does the accounting system provide required partnership accounting facilities and support for generating tax statements?
	What facilities do you have for viewing positions in groups (such as by strategy)?

While it is not yet clear if 130/30 funds will attain their projected growth, it is safe to say that the performance of the current crop of 130/30 products will be closely watched to see if alpha is achievable. Regardless, there will be increasing demand for managers to provide more alternative investment vehicles to their clients in the future. This will present increasing challenges to the systems and operations areas to enhance their systems and processes to mitigate the additional risk associated with this trend.