A Unique Investment Strategy For Mutual Fund Investors

Hedge funds are becoming very popular in the news with the guru’s clamoring for increased regulation and the chicken littles sounding the market crash alarm. Hedge funds are private investment organizations that uses a different strategies protecting wealth from risks of volatile markets. It uses an unconventional investments to makeup losses when the market turns sour. They generally have a very different investment policies as compared to any mutual fund. Hedge funds tend to be more philosophical as compared to mutual funds which may cite growth or income. Capital growth and capital preservation are indeed goals of hedge fund investors.

Hedge fund managers are given much control over funds investments. But when we speak of any mutual fund, prospectus usually outline maximum and minimum allocations for different asset classes forbidding managers from riskier strategies such as shorting. So in a hedge fund the investments are up to the sole discretion of the manager. One might also call Hedge funds as strategy allocation as they may use a number of investment strategies to limit the fund’s exposure to any given strategy. Hedge fund managers may sell a large percentage of the fund’s securities and hold cash or other hard assets including commodities futures. The hedge fund manager would usually decide if a stock is overvalued for one reason or the other. Short selling would include selling securities that one does not own in order to buy them back at a discount so anyone with a margin account can do this. Such trading requires a healthy amount of assets to cover up just in case the security actually rise in value.
When we speak of hedge funds, short selling is always accompanied by long positions. Such strategies purchase securities that they believe would rise in value and simultaneously short selling those that are believed will fall. Such funds would either be net short or net long, depending on what direction the manager sees the market going. Using a long-short method within an asset class, an equity market neutral strategy may be used that earns returns from stock-picking within an industry or market and hedges against volatility. This strategy hedges against market risks. Sometimes an equity market neutral funds may employ a similar strategy called as market neutral arbitrage which would mean to imbalance the pricing between securities. Such arbitrage seeks out imbalances in multiple securities from the same issuer. The strategy would hedge market risks by investing in opposing positions in different asset class of the same issuer thus limiting the market risk. So in such a case even if the company does poorly, the investment may do very well. Certain risk arbitrage would also focus on companies involved in a takeover or merger. This strategy provides relatively consistent returns regardless of the market conditions. So looking at any of the above strategies one can say that hedge funds are a smart way of investments.

Mutual Fund Investing Pros and Cons

Mutual funds have often seemed like a golden investment because what can be a relatively small amount of money ends up being greatly diversified. The core idea of this kind of investment goes back to the basic rule of, dont put all your eggs in one basket.

In recent years it has become more apparent that there is no such thing as a guaranteed investment. Companies that appear to be solid from all angles can quickly fall apart no matter how big they are. Because of this you would never want to invest all of your money in one or two companies because no matter how good the investment may seem, anything can happen tomorrow; however, when you invest in hundreds of companies that each look like they will have positive returns then even if a high amount of them fail the others should inevitably make up the difference.

Since so many of us can not afford to build such a diverse portfolio on our own, a mutual fund is a great idea. That alone is perhaps the best pro a mutual fund has over things like stock by stock investments. Of course it is important to know that, even over a long period of time, there is never a guarantee your initial investment will pay off. Mutual funds are by no means immune to mistakes and their chosen stocks are by no means immune to failure.

Saying that, if the mutual fund is failing or it has made enough money that you wish to cash out, they are a very liquid form of investment. Unlike some other group investments you can withdraw your money from a mutual fund with ease. Of course there are fees associated with this and successful investing comes with a high tax.

Mutual funds also offer very little control. In fact, once you have chosen a mutual fund to invest in your control of your money has pretty much come to an end. With most, of, if not all of, these funds the investor not only has no say in what companies get invested in but they can not even find out what the mutual funds portfolio looks like. Aside from the funds being unwilling to divulge all of this information they are also often unable to seeing as the day to day trading is so vast.

On a similar note, mutual fund investors can not see a day to day value of their investment; whereas an investment in an individual stock can be checked up to the second. This means that between statements the investor is pretty much in the dark about how their money is doing, let alone what it is doing.

All of this being said, mutual funds are a diverse investment that allows you to buy in with limited money. Perhaps their best perk is that your money ends up being professionally managed by people who are often amongst the best in the business.