Hedging without getting clipped: some funds offer the benefits of hedge funds without the high fees.Some people would have you believe that in order to get investing profits in a bull or bear market, you have to invest in hedge funds. But these vehicles, which are prized for delivering "absolute returns," are not for everyone. Some hedge funds only accept millionaires and six- or seven-figure minimum investments are common. Hedge funds are largely unregulated, their fees are high, and liquidity is low. For the average investor, there has to be a better way. Dan McNeela a senior analyst at mutual fund tracker Morningstar, says, "A few mutual funds provide [hedge fund] strategies to investors." Investing in these hedge-fund-like mutual funds can be done for as little as $1,000, and you can cash out whenever you like. "Long-short" funds buy, or go long on, stocks they think will appreciate while simultaneously selling, or going short Going short Selling stock that an investor does not own by borrowing shares from a broker. The assumption is that the price will fall. The investor then buys (covers the short) the shares at a lower price than what they were sold for, recognizing the difference as a profit. Antithesis of going long. on, stocks
they think are overpriced. (If you sell short on a stock at, say, $25
per share and then close your position once the stock drops to $15,
you'd have a $10-per-share profit.) Such an approach is considered
less risky than investing in most stock funds because short positions
may deliver gains in a bear market."Although Iong-short funds are generally less volatile than traditional stock funds, they still can be risky. A manager's Iong picks might be losers, while the short positions may go up in value," says McNeela. "Therefore, you'll see large variations among long-short funds." In 2003, for example, Choice Long-Short Fund lost 16.6%, while ICON Long-Short Fund gained 17.7%. So-called "market-neutral'" funds also go long and short. "While long-short funds tend to tilt toward the long side," says McNeela, "market-neutral funds keep a 50-50 balance. Half of the money is long, while the other half is short." Even with such a split, there's always a chance that a market-neutral fund will be long on stocks that aren't performing and short on stocks that are. For example, if tech topples while healthcare skyrockets, such a market-neutral fund could have a disastrous year. Some market-neutral funds, therefore, aim for sector-by-sector neutrality. If it buys long on Pfizer, for example, it might sell short on Merck The goal is to reduce the effects of industry and broad-market swings by consistently generating positive returns via savvy stock-picking. "In practice, market-neutral funds have largely lived up to their billing by diversifying investors' portfolios," says McNeela, "They've often lagged behind the market during good years but beat the market in bad times." McNeela advises investors to look closely at the techniques used by each type of fund. Still other types of hedging strategies may be accessed through mutual funds. There are bear funds that are primarily, if not entirely, short sellers. A relatively new fund, Alpha Hedged Strategies Fund, follows multiple techniques. Several subadvisers manage a portion of the portfolio, pursuing strategies ranging from convertible bond arbitrage to distressed securities. "This fund has a low minimum investment and daily liquidity," says Alan Weiss, president of Regent Wealth Management Group in Woodbridge, Connecticut. "So if you have a desire to invest in an alternative investment that doesn't follow the U.S. stock market too closely, then this may be an investment for you to consider." For mutual funds that can help diversify your holdings, Lon Morton, an investment adviser in Calabasas, California, recommends: Alpha Hedged Strategies and Merger funds, Schwab Hedged Equity Select, FPA Crescent, Hussman Strategic Growth, Analytic Defensive Equity, Robeco Boston Partners Long/Short Equity Long/Short Equity A hedge fund strategy that involves buying certain stocks long and selling others short. There usually isn't a restriction on the country that the stocks trade in either.Notes: This type of hedge fund basically has free reign to buy or sell what it likes. A long/short equity hedge fund is usually considered to be higher risk. See also: Hedge, Hedge Fund, Long, Short , and PIMCO All Asset All Authority. "If
you put a few of them together," he says, "you can get some of
the benefits of hedge funds."Keep in mind that an investment in a hedge fund is ultimately a bet on the manager's ability, and the same is true for hedge-like mutual funds. Before investing, look for evidence that a fund's manager has a proven track record.
TOP HEDGE-LIKE MUTUAL FUNDS
1-Year 3-Year 5-Year
Ann. Total Ann. Total Ann. Total
Fund Name Ticker Return * Return * Return *
ICON Long/Short I IOLIX 9.15 17.29 NA
FPA Crescent FPACX 10.54 14.67 18.58
Hussman Strategic HSGFX 6.20 11.24 13.41
Growth
Robeco Boston Partners BPLEX 20.19 7.18 11.33
Long/Short Eq Inv
Arbitrage R ARBFX 1.17 4.91 6.99
Merger Fund MERFX 1.84 4.51 1.86
Analytic Defensive ANAEX NA NA NA
Equity A **
PIMCO All Asset All PAUAX NA NA NA
Authority A **
Initial Toll-Free Expense
Fund Name Investment Number Ratio
ICON Long/Short I $1,000 800-764-0442 1.74
FPA Crescent $1,500 800-982-4372 1.4
Hussman Strategic $1,000 800-487-7626 1.24
Growth
Robeco Boston Partners $2,500 888-261-4073 3.17
Long/Short Eq Inv
Arbitrage R $2,000 800-295-4485 1.95
Merger Fund $2,000 800-343-8959 1.87
Analytic Defensive $2,500 866-777-7818 NA
Equity A **
PIMCO All Asset All $5,000 800-426-0107 NA
Authority A **
* AS OF NOV. 30, 2006 SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY
EFFORT TO ENSURE THE ACCURACY AND COMPLETENESS OF THIS DATA, BUT CANNOT
GUARANTEE IT. ** FUND HAS OPERATED LESS THAN ONE YEAR.
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