Investors Business Daily – (MarketWatch) — Mutual funds that use sophisticated strategies to control stock-market risk are coming out from behind their hedges.
Long-short funds, which attempt to profit whether stock prices are rising or falling, were recognized as a distinct category of funds by investment researcher Morningstar Inc. on March 1. A list of about 30 funds is now available.
And fund tracker Lipper Inc. plans to roll out separate groupings in mid-April for long-short funds and their cousins, market-neutral funds, which aim to insulate investors from wide stock-price swings. Morningstar includes market-neutral funds in its long-short category.
Institutions and hedge funds routinely use both long-short and market-neutral tactics for capital appreciation and capital preservation. But these professional tools are increasingly geared to retail investors and financial advisers for whom the 2000-2002 bear market is still a painful memory. Large fund companies such as Janus Capital Group Inc. (JNS), American Century Investments and Franklin Resources Inc. (BEN), for example, manage such funds or intend to offer them.
In a long-short fund, “long” refers to stocks owned outright, while “short” refers to short-selling stocks that an investor believes will tumble. Short sellers borrow shares and sell them to other investors, hoping to buy back the shares later at lower prices.
The strategy gives a manager flexibility to be bullish in one market sector and bearish in another. Long-short funds typically hold mostly long positions and tweak the portfolio’s percentage of short candidates depending on market conditions. These funds are making a directional bet, and — if a manager’s stock selection is on target — can do well in both market rallies and corrections.
