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Three "Hedge Funds" for the Masses
06/17/2009 1:00 pm EST
Russel Kinnel, Morningstar’s director of fund research and editor of Morningstar FundInvestor, says some mutual funds are using hedge fund strategies successfully.
Now that’s a relief rally! Things don’t look so gloomy after the great spring rally we enjoyed. This brings the market a little closer to fair value.
[Yet] the economy is still a mess. The government has to unwind its huge position in bonds, banks, insurers, and automakers. If all the stimulus works, we might have economic growth, but rising inflation. If it doesn’t, we could have deflation and be stuck in a rut like Japan in the 1990s.
When stocks were super cheap and commodities super pricey, there weren’t many hedges that I liked, but now it seems reasonable to consider them. Here then are some funds that could hold up well if we get a bout of disappointing news.
Hussman Strategic Growth (HSGFX). This long-short fund takes the edge off market downturns. John Hussman takes long positions in individual stocks but offsets some of that market exposure by shorting indexes. While that has limited the fund’s upside, it has made it a standout in difficult times. It lost 9% in 2008, but enjoyed positive returns in every other calendar year since its inception in 2000. The fund’s expense ratio of 1.11% as of June 2008 makes it a relative bargain in the overpriced long-short world.
Calamos Market Neutral Income (CVSIX). The implosion of hedge funds makes this fund more appealing. The three Calamoses running this fund employ a strategy that’s popular in the hedge fund world: convertible arbitrage. The idea is to find convertible bonds that are cheaper than the underlying stock they convert into and buy the convert while shorting the common stock. When it works, the strategy provides a modest but fairly dependable return.
In 2008, the hedge fund collapse and recession hurt the convertible market, and the fund lost 13%. However, it earned positive single-digit returns in the previous bear market, and its hunting grounds won’t be so picked over now that the hedgies have gone.
Caldwell & Orkin Market Opportunity (COAGX). Manager Michael Orkin has wide latitude and can go from 100% net long all the way to 60% net short. He uses a multifactor model to quickly shift among long and short equity positions, bonds, and cash. At the end of April, the fund was 44% long equities, 28% short, with the rest in bonds and cash. Although Orkin sometimes zigs when he should zag, the long-term performance is excellent. Over the past 15 years, the fund has returned an annualized 9% gain, yet its worst loss was a 6.6% drop in 2003. The fund charges an expense ratio of 1.13% as of October 2008, but when you factor in short interest, that figure pops to 1.95%.
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