Back in 2007 hopes were pinned on 130/30 as the fund industry’s savior. Well, no more, according to WSJ.com.

Should this come as a surprise? Think of it this way: if active managers were having such a hard time picking stocks for the long side (and go to cash if nothing looked good), was there really a good reason to believe they could pick them on the short side?

Leverage Shakes Up Mutual Funds, Which Discover a Strategy’s Downside
Early last year, Wall Street was heavily promoting several new types of funds that rely on borrowing money. These include so-called 130/30 funds that aim to amplify market returns by betting against some stocks, as well as “leveraged index” funds, which promise to double the return of a market index or double its inverse.

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While borrowing money can improve returns in good times, it also widens losses in bad times, and that is what happened in 2008.

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The biggest users of leverage are closed-end funds, versions of mutual funds that trade like a stock. About 72% of the 600-odd funds use leverage, according to Cecilia Gondor of Thomas Herzfeld Advisors Inc. They borrow money at lower, short-term rates and invest it in securities that they expect will earn them higher returns.

Hat tip to Abnormal Returns.