Russel Kinnel and analyst Greg Carlson write in Morningstar FundInvestor about a long-short mutual fund that doesn’t charge hedge-fund fees.

Gateway A (GATEX) is designed to provide hedged exposure to the equity markets and generate solid absolute returns.

This fund goes the same direction as the stock market, but in a more muted way. In the October 2007 - March 2009 bear market, it lost 27%—nine percentage points more than its typical rival. However, it’s enjoyed a correspondingly bigger bounce as stocks have rebounded.

Measured against the Standard & Poor’s 500, the fund looks pretty tame; it lost only half as much as the index in the bear market, for example. Over the long haul, the fund looks to have met its goal of cranking out solid gains with modest volatility.

Since Patrick Rogers took the helm in November 1994, it’s gained an annualized 5.7% though, versus 7.7% for the S&P (and the fund was less than half as volatile as the index over that span, as measured by the standard deviations of their returns).

It has several moving parts: It holds a broadly diversified equity portfolio that closely resembles the S&P 500, but management prefers stocks that pay higher dividends, so it can gain an edge while still coming close to the S&P 500’s risk profile.

Rogers and company sell call options on the S&P 500 to generate additional income and buy index puts for downside protection. The calls are essentially covered in the sense that losses, if the calls are repurchased at a higher price, will be made up for by gains in the stocks the fund holds.

It’s worth noting that the price of puts varies—it generally rises as the markets become more volatile, although the fund makes more money writing call options in such an environment—so the amount of protection the fund purchases varies. Also, those puts are typically 6%–10% below current levels, and in a quickly falling market, the fund may lose that much or more.

We like this fund for many reasons. One, it gives investors an alternative to full-on stock market exposure, when the future of the economy is so uncertain. Two, longtime manager Rogers actively manages the risk exposure, unlike passive buy-write option strategies available in ETF form.

Third, the fund keeps expenses low, one of the lowest in the category and less than just 20 basis points more expensive than an ETF. This fund’s 0.94% expense ratio is the lowest among funds in the long-short category with a minimum initial purchase below institutional-level amounts (although this share class does come with a front-end load of 5.75%—Editor.) Finally, Rogers actively manages taxes, making the fund an option for taxable accounts.

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