Your Partners for your wealth and prosperity living

Mutual Funds With Hedge Fund Ambitions

Do you have a million dollars in your back pocket, or $200,000 a year in income? If not, you cant qualify as an accredited investor according to the SEC. and it means you are completely shut out of investing in hedge funds .

If you lack the buy-in, but still want a taste of what hedge funds have to offer, I have good news. Several mutual funds have popped up that use short strategies and other methods within their portfolios to be hedge fund-like, and anyone can invest. (To learn more about these mutual funds, check out The Rise Of The Hedge Fund .)

The Big Fuss About Hedge Funds

This secrecy is a real risk. If a hedge fund does start to tank, an investor may not know to pull out until it there is no money left. But the accredited investor block out causes disadvantages as well; many of the non-market correlated strategies that hedge funds provide can help all investors with their diversification needs. Mutual funds have had some trouble since a mutual fund manager can not hold more assets short than long. (For more background on hedge fund strategies, check out Massive Hedge Fund Failures and Taking A Look Behind Hedge Funds .)

Hedge Fundish

This dilemma has been somewhat diminished due to some pioneering mutual funds over the last few years. Mutual funds cannot have more assets short than long, but shorting is still possible, and an influx of funds have hit the market that have hedge-like strategies, such as long/short, market neutral and merger arbitrage .

To start there is the Grizzly Short Fund (GRZZX), which actually has all of its equity holding short, with no long exposure. This is possible since the management holds more than twice the amount of short equity in cash as a cushion. Even with two-thirds of the portfolio in cash, management has been able to approximately earn a 20% return year to date (YTD). The long-term performance of the fund has not been stellar with up-market years of 2003 and 2006 seeing losses of 31% and 12% respectively, but the fund could help long investors balance their investments a little.

For long/short strategies there are plenty to choose from. I stumbled across Ivy Asset Strategy (WASAX), which boasts a four-star rating from Morningstar, and while Morningstar doesnt classify it as long/short, it has a net short position in equities. This exposure is offset by a net long position in cash, and a long position in bonds. The fund has been down about 2% YTD, but has performed very well returning around 20% per year on average for both the three-year and five-year periods. Another great pick in this area is Diamond Hill Long/Short Fund (DIAMX). This fund gets a five-star rating from Morningstar, and despite low returns in 2007 and 2008, the fund had a 17% average return over the last five years.

Market Neutral