It’s been an up-and-down summer for stocks, and Labor Day weekend might not mark the end of Wall Street’s worries (see BusinessWeek.com, 8/18/06, “Can the Rally Keep Up?”). As uncertainty continues over economic growth and inflation, many investors may be looking for ways to reduce risk in their portfolios. In small doses, mutual funds that use hedging strategies can help do just that.
Hedge fundsâ€â€private investment pools that cater to wealthy investorsâ€â€have gotten plenty of buzz in recent years for their sophisticated strategies and exclusive allure. Nevertheless, typical investors probably can’t meet the lofty investment minimums and high fees that hedge funds demand. Enter hedge-like mutual funds (see BusinessWeek.com, 12/12/05, “Funds Made to Deliver”).
Like hedge funds, these mutual funds strive for top-notch returns in any kind of market. Some hedge-like mutual funds can give a portfolio extra diversificationâ€â€and reduce overall riskâ€â€because, as with commodities or real estate, their returns usually don’t correlate with the broader stock market. “If you’ve got a longer time horizon and you want to provide some diversity to your portfolio, a hedging instrument would be a good addition,” says Philip Edwards, managing director of Standard & Poor’s Investor Services.
