Hedging Without Getting Clipped - Black Enterprise

Page: 1 2

  • Entrepreneurship
  • Money
  • Leadership
    • Career
    • Education
    • Jobs
    • Men
    • Women
  • Technology
  • Lifestyle
  • Events
    • Black Men Xcel
    • Entrepreneurs Summit
    • TechConneXt
    • Women of Power
    • American Black Film Festival
    • ABFF Honors
  • Lists
  • Magazine
  • Videos
  • TV Shows
    • Our World
    • Women of Power
25 black women who are changing the world

January/February 2018

Black Enterprise
  • Entrepreneurship
  • Money
  • Leadership
    • Career
    • Education
    • Jobs
    • Men
    • Women
  • Technology
  • Lifestyle
  • Events
    • Black Men Xcel
    • Entrepreneurs Summit
    • TechConneXt
    • Women of Power
    • American Black Film Festival
    • ABFF Honors
  • Lists
  • Magazine
  • Videos
  • TV Shows
    • Our World
    • Women of Power

Hedging Without Getting Clipped

by  Donald Jay Korn
March 1, 2006

Page: 1 2

Some people would have you believe that in order to get investment profits in a bull or bear market, you have to invest in hedge funds. But these vehicles, which are prized for delivering “absolute returns,” are not for everyone. Some hedge funds only accept millionaires, and six- or seven-figure minimum investments are common. Hedge funds are largely unregulated, their fees are high, and liquidity is low. For the average investor, there has to be a better way.

Dan McNeela, a senior analyst at mutual fund tracker Morningstar, says, “A few mutual funds provide [hedge fund] strategies to investors.” Investing in these hedge-fund-like mutual funds can be done for as little as $1,000, and you can cash out whenever you like.

“Long-short” funds buy, or go long on, stocks they think will appreciate while simultaneously selling, or going short on, stocks they think are overpriced. (If you sell short on a stock at, say, $25 per share and then close your position once the stock drops to $15, you’d have a $10-per-share profit.) Such an approach is considered less risky than investing in most stock funds because short positions may deliver gains in a bear market.

“Although long-short funds are generally less volatile than traditional stock funds, they still can be risky. A manager’s long picks might be losers, while the short positions may go up in value,” says McNeela. “Therefore, you’ll see large variations among long-short funds.” In 2003, for example, Choice Long-Short Fund lost 16.6%, while ICON Long-Short Fund gained 17.7%.

So-called “market-neutral” funds also go long and short. “While long-short funds tend to tilt toward the long side,” says McNeela, “market-neutral funds keep a 50-50 balance. Half of the money is long, while the other half is short.”

Even with such a split, there’s always a chance that a market-neutral fund will be long on stocks that aren’t performing and short on stocks that are. For example, if tech topples while healthcare skyrockets, such a market-neutral fund could have a disastrous year.

Some market-neutral funds, therefore, aim for sector-by-sector neutrality. If it buys long on Pfizer, for example, it might sell short on Merck. The goal is to reduce the effects of industry and broad-market swings by consistently generating positive returns via savvy stock-picking. “In practice, market-neutral funds have largely lived up to their billing by diversifying investors’ portfolios,” says McNeela, “They’ve often lagged behind the market during good years but beat the market in bad times.” McNeela advises investors to look closely at the techniques used by each type of fund.

Still other types of hedging strategies may be accessed through mutual funds. There are bear funds that are primarily, if not entirely, short sellers. A relatively new fund, Alpha Hedged Strategies Fund, follows multiple techniques. Several subadvisers manage a portion of the portfolio, pursuing strategies ranging from convertible bond arbitrage to distressed securities. “This fund has a low minimum investment and daily liquidity,” says Alan Weiss, president of Regent Wealth Management Group in Woodbridge, Connecticut. “So if you have a desire

Page: 1 2

Join the Conversation


MORE ON BlackEnterprise.com
Money Smart Week
Featured Stories
Money Smart Week Helps Keep You in the Black
by  Robin White Goode
obama foundation
Featured Stories
Obama Foundation To Train 200 Emerging African Leaders
by  Adedamola Agboola
google
Entrepreneurship
Google and Walmart Award $5 Million Grant to Innovators In Workforce Development
by  Adedamola Agboola

TRENDING

  • Baltimore May Sell Homes for $1 to Revive Neglected…
  • Spotify is Looking for New Female Podcasters of Color
  • Meet Melissa Harville-Lebron: The First Black Woman to Own a
  • Free Money? The Top 10 Grants Available to Black, Minority…
  • 7 Top Grants Or Free Money For Black Women Entrepreneurs
  • U.S. Small Business Administration and Milken Institute…
  • 5 Books Every Millennial Entrepreneur Must Read
  • Top WNBA Salaries vs. NBA Salaries: Who Earns More? [2017…
  • Meet the Dallas Mavericks’ New CEO
  • Chance the Rapper Hosts Holiday Party to Help the Homeless
Women of Power WOMEN OF POWER SUMMIT
Entrepreneurs Summit ENTREPRENEURS SUMMIT
American Black File Festival AMERICAN BLACK FILM FESTIVAL
Our World OUR WORLD WITH BLACK ENTERPRISE
Women of Power TV WOMEN OF POWER TV
25 black women who are changing the world
SUBSCRIBE
GIVE A GIFT
CUSTOMER SERVICE
  • © 2018
  • BLACK ENTERPRISE
  • Management
  • About
  • Privacy Policy
  • Contact
  • Site Map
  • Masthead
  • Media Kit