Janet Paskin of the Wall Street Journal reports that mutual funds are trying to emulate hedge funds in an attempt to satisfy average investors needs in alternative fund classes. In the past, hedge funds have been the investment country clubs for wealthy investors. The average investor had no access to hedge funds because he/she was deemed too unsophisticated to research the complex strategies utilized be hedge fund managers and were therefore banned from the gated hedge fund community (by the SEC).
According to the investment-research company Morningstar,Inc., 132 mutual funds are offering hedge-like strategies to investors, half of which have been launched since 2006. Why is this appealing to investors? While some hedge funds fell short last year and the hedge fund industry lost 20% on the average, the market lost 39%.
Many of these hedge-like funds are using the traditional strategies of the hedge fund industry. Some use short selling, or borrowing shares to sell and trying to buy them back at a lower price later, which adds leverage to the portfolio. Others try to find arbitrage opportunities to exploit price differences between securities. Other funds try to mimic the returns of the hedge fund universe.
“These are strategies that should have been offered to retail investors a long time ago,” according to Morningstar analyst Nadia Papagiannis. These hedge-like funds have amassed over $41.3 billion in assets, which has grown in each of the last three years. This is a stark contrast to the mutual fund universe, which saw a contraction of over $100 billion of assets in 2008.
Over the next couple of weeks, I will discuss the various trading strategies used by hedge-like mutual funds and where they fit portfolio allocation needs.