Frightened Investors Turn Towards "Alternative" Mutual Funds

Posted by - Monday, October 10th, 2011

In critical times, credit risk and equity risk are very closely related. Investors really caught onto this idea after the 2008 economic meltdown.

In reaction to the uncertainty in the markets in lieu of all the crazy stock market volatility, some new alternative hedge funds have been profiting from the bleak situation our economy is in now.

The trend really picked up speed in 2006, but the collapse of the Lehman Brothers before the collapse of 2008 really had investors thinking more like hedge fund managers. They started thinking outside of the little box full of traditional stocks and bonds – looking towards alternative mutual funds instead.

Image courtesy of The Economist.

These “alternative” mutual funds that have been popping up here and there allow individual investors to “dabble in short, ultra-short, long-short, market-neutral and other strategies once reserved largely for hedge funds and other institutional investors.”

Flash-foward to 2011, and investors have already poured millions of dollars into these types of funds...

This year alone, there have been 249 ETFs – 90 of those (36 percent) were alternative and commodity ETFs. Likewise, there have been 333 new mutural funds, with 48 of them (14 percent) being alternative and commodity funds.

The most common funds are “long-short,” which can buy stocks or go “short” (which is the practice of borrowing a stock and selling it in hopes of buying it back later at a cheaper price and pocketing the difference).

Also popular among the so-called hedge fund clones is “market-neutral” funds, which aim to make money under all conditions and give zero market risk by balancing long and short positions.

“Arbitrage” or merger funds are also so something investors can reflect on...allowing them to bet on options, currencies, commodities and corporate takeovers.

Overall, this investment strategy lets investors “smooth out peaks and valleys.” The biggest problem with them is that they don't do so well in capturing the upside, although the provide pretty solid protection from the downside.

Here's a list of some examples of these newly popular "alternative" funds, compiled by

  • Gateway Fund (GATEX)

  • Diamond Hill Focus Long-Short (DIAMX)

  • Hussman Strategic Growth (HSGFX)

  • Legg Mason Opportunity fund

  • the Boston Partners Long/Short fund

  • Nakoma Absolute Return Fund (NARFX)

  • New Century Alternative Strategies Fund (NCHPX)

  • Alpha Hedged Strategies Fund (ALPHX)

  • Beta Hedged Strategies Fund (BETAX)

  • TFS Market Neutral Fund (TFSMX)

  • Allianz NACM Pacific Rim A (PPRAX)

  • Caldwell & Orkin Mkt Opportunit (COAGX)

  • Diamond Hill Long-Short Fd Cl A (DIAMX)

  • Federated Market Opportunity A (FMAAX)

  • Fidelity Estate High Income Fd

  • Forester Value Fund (FVALX)

  • Franklin Templeton Hard Curr Adv (ICHHX)

  • Gabelli ABC Fund (GABCX)

  • ING PIMCO Total Return S (IPTSX)

  • James Advantage Market Neutral A (JAMNX)

  • JPMorgan Multi-Cap Mrkt Netral A (OGNAX)

  • Laudus Rosenberg US LgMdCp L/S Inv (RMNIX)

  • Laudus Rosenberg Value Lg/Shrt Inst (BMNIX)

  • Nations Mort & Asset Backed Port (NMTGX)

  • Pinnacle Value Fund (PVFIX)

  • Robeco Boston Ptrs Lg/Sh Equit Inv (BPLEX)

  • Select Environmental (FSLEX)

*Indented excerpts from CNBC.


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