Hedge-funds have gotten a lot of hype over the past few years, but for most investors they are out of their league; not to mention potentially risky. That isn’t to say they don’t have a place in your overall investment picture, but how can an average investor take part in a hedge-fund strategy when the average minimum investment is $1 Million?
The answer is a long-short mutual fund. While not exactly the same, they employ the same general strategy consisting of long and short stock positions seeking low-volatility returns in unpredictable markets. Don’t confuse long-short funds with market-neutral funds, they are different. Market neutral funds balance their long and short positions to give a net exposure to the market of zero. Long-short funds generally have a consistent bias to long positions and will adjust the mix over time in response to market conditions.
While this sounds good, you do have to determine what part this strategy plays in your portfolio. It certainly is not meant to be a core position, and it is not always suitable for all market conditions. In a strong bullish market they may actually under perform more standard equity funds, just like in a strong bearish market they may also under perform fixed income or cash investments. In a market that lacks direction though, these funds may outperform. So, they can find a nice small place in your portfolio to hedge uncertain market conditions.
So what are some long-short funds and how have they been performing? Here is a list of some of the better performing funds with year-to-date and trailing 3 and 5 year returns:
Keep in mind, these funds are not for everyone. They typically have higher expense ratios and front-end loads. The Analytic fund is a no-load, and the expense ratio is among the lowest in this fund category. While the returns are nothing too outstanding, I would recommend punching the symbols into Morningstar and look at how they held up during 2002 relative to the S&P 500. In that period they generally outperformed the S&P by double digits.
As always, check with your financial professional if you use one and use this as a starting point for further research. These funds just may have a place in your portfolio to help apply a hedge-fund like strategy without shelling out too much cash and reducing some of the excess risk.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.