With interest in 130/30 strategies exploding, it was only a matter of time until a large index provider launched an index tracking the strategy. Standard and Poor's took a shot yesterday with its new S&P 50 130/30 Strategy Index.

130/30 is a blanket term for strategies that attempt to boost returns by using the wonders of leverage, shorting and all the other tools in an aggressive portfolio manager's tool kit. Typically, a 130/30 strategy will pair a 100% core portfolio—say, a long position in the S&P 500—with a 30%/30% long/short basket. Inside the 30/30 basket, the portfolio manager will go long stocks worth what she thinks will outperform and short stocks that she thinks will underperform. The intended result is higher returns with lower risk.

"The S&P 500 130/30 Strategy Index ... provides risk-controlled, long/short exposure with the prospect of outperformance in a transparent, cost-efficient format," says S&P Index Services Head of Global Research and Design Srikant Dash.

The index has three parts: the S&P 500, which comprises the core of the overall index; a 30-stock basket that holds 1% overweight positions in components expected to outperform; and a 30-stock basket that holds 1% underweight positions in components expected to underperform. Because the S&P 500's stocks are generally less than 1% of the index, a 1% underweighting means a stock will be shorted.

S&P will use its Stock Appreciation Ranking System (STARS) to choose the over- and underweight positions. The STARS system relies on S&P analysts to rate stocks on a call of 1 ("Strong Sell") to 5 ("Strong Buy"), and it has a strong track record of returns. In the index, the fund may take overweight positions on stocks rated 4 ("Buy") or 5 ("Strong Buy"), and underweight positions in stocks rated 1 ("Strong Sell"), 2 ("Sell") or 3 ("Hold"). Stocks are ranked by a combination of industry-relative external financing and industry-relative valuation, and the top 30 for each basket are included in the 30/30 portfolio. As of October 31, this process translated into a long exposure of 121.06% and a short exposure of 21.06%. The index is rebalanced quarterly.

130/30 is generally thought of as a prototypical active strategy—almost a page from the hedge fund management tool kit. But the growing acceptance of quantitative stock-picking strategies in the investment world actually makes it a nice fit with an index strategy. In fact, Dash said that S&P hopes this index will offer investors a way to gain exposure to a particular investment strategy; in other words, look for product filings tied to this index soon.

On a backtested basis, the S&P 500 130/30 Strategy Index had a 12-month return of 15.35% versus the S&P 500's 14.56%. For the three-year period, it was up 14.97% versus 13.16% on an annualized basis, and for the five-year period, it was up 14.69% versus 13.88% for the S&P 500.