Investors Business Daily – (MarketWatch) — Mutual funds that use sophisticated strategies to control stock-market risk are coming out from behind their hedges.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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<\/a>), American Century Investments and Franklin Resources Inc. (BEN<\/a>), for example, manage such funds or intend to offer them.<\/p>\n 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.<\/p>\n 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.<\/p>\n