Hedge Funds Can Do More Than Hedge Fund Type Mutual Funds

Hedge Funds Can Do More Than Hedge Fund-Type Mutual Funds

by

Shane Flait

Hedge funds use a variety of techniques to seek an absolute return no matter what the markets do. Their performance has instigated the birth of many hedge-type mutual funds. But SEC restrictions on mutual funds limit techniques that real hedge funds rely on for their high gains.

Hedge funds (HFs) are privately offered investments that use a variety of non-traditional strategies to try to offset risk and seek a high gain irrespective of market trends. HF managers use short-selling and a variety of financial derivatives to support their strategy. They may invest in non-traditional or illiquid assets, such as loans or private equity, distressed assets, or use arbitrage techniques to capitalize on merger opportunities or perceived incorrect valuations among closely related securities.

That\’s why HF managers must be highly skilled – certainly in their investment leveraging specialty – and are highly rewarded for good performance. Typical hedge fund fees include a 2% management fee and a 20% take on profits. With such high fees, they have to produce high returns for their investors.

The Security and Exchange Commission (SEC) doesn\’t regulate hedge funds since HF investors are restricted in number and must be financially qualified to invest in a hedge fund.

Seeking to capitalize on the allure of hedge funds, \’hedge fund\’ type mutual funds have been created. But because mutual funds are regulated by the SEC, mutual fund (MF) managers are restricted from using some of the investment techniques that real hedge funds can use. For example, they can\’t use the same amount of leverage as a hedge fund and can\’t invest in thinly traded shares.

Nevertheless, MF managers of hedge-type mutual funds use active management to hedge more against downside risks. Their strategies can produce lower correlation with other asset classes which can make them a good diversification and risk management tool in changing market environments. But, alas, less leverage and risky trading make it difficult for such mutual funds to match the best-performing hedge funds.

Morningstar tracks many hedge-type mutual funds. And so far, they\’re more expensive than typical mutual funds – but still far less costly than a top hedge fund. A typical \’hedge-type\’ mutual fund has expenses of 1.5% to 2% annually. That\’s far higher than the average 1.35% for plain old mutual funds. But it\’s still far less than the 2% management fee and 20% profit take of a typical hedge fund.

If you\’re interested in a hedge-type mutual fund, check out its purpose to see how it can complement your other investment goals. It may offer a good diversification option among your asset allocations.

Shane Flait helps you with your financial legal, tax, and retirement goals. Get his FREE report on Managing Your Retirement =>http://www.easyretirementknowhow.com/FreeReportandSignUp.htmRead his ebook: \’Wise Way to Financial Independence\’ =>http://www.easyretirementknowhow.com/WiseWayGate.htm

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