New York (HedgeCo.Net) A phrase that gets used quite often on the financial networks is “risk-on risk-off”. Given the huge decline in the market last week it was mostly risk-off that was being spoken and with good reason. Risk-on risk-off is a somewhat simplified way of saying that investors move capital to safer investments when risk is high and when the perceived risk is low they move capital to riskier investments.

One way of moving capital to safer investments is by moving to cash. Hedge fund managers have this option, but most mutual funds and exchange traded funds don’t have that option available to them as the by-laws of those funds usually have a provision that states a certain percentage of assets has to be invested. That is unfortunate for the managers of the mutual funds and ETFs as there are times when cash is the right place to be.

One of the fund managers on the HedgeCoVest platform moved to cash last Tuesday and by doing so they missed the big declines on Thursday and Friday. The Probabilities Long/Short Equity model was the model that moved to cash and by taking that action, the model was the second best performing fund manager model on the platform last week with a gain of 0.24%.

With mutual fund managers and ETF managers forced to stay invested, it is unlikely they were able to post any kind of gains last week. All ten of the main sectors lost ground and eight of the ten lost 4.88% or more. If the fund manager is required to keep 80% in equities and almost all equities move lower, it would almost be impossible for the fund to post a gain or even breakeven during a selloff like we saw last week. As an example, the Fidelity Contrafund is one of the largest mutual funds in the world. It typically keeps 90% of its assets invested in U.S. stocks. As of June 30, the fund had 90.23% invested in domestic stocks and 1.04% in cash. The fund lost 6.63% last week as a result of the selling that hit the market.

The ability for hedge funds and the models on the HedgeCoVest platform to move to cash, if they see the need, gives them an advantage over mutual funds and ETFs that have restrictions on how much cash they can hold. The flexibility to move to cash or lower equity holdings can make hedge funds and the HedgeCoVest models less risky and less susceptible during a down market.

Rick Pendergraft
Research Analyst
HedgeCoVest