September 14, 2006
Better Than A Hedge Fund
Since I’ve written about hybrid mutual funds and how you can invest in them, I think I have stoked up enough interest in this particular product. So, I guess it is time to elucidate on the subject. Firstly, let us look at certain figures I got of the web: Diamond Hill Focus Long/Short, one of the best performers in this type of fund has returns of 17.93% and 9.93% for three and five years, respectively.
How do they manage such returns? Well, they invest in all kinds of market with the ultimate goal of making money even in the case of a meltdown. Another good thing about these funds is that they strive to get absolute returns – but herein lies their greatest weakness. This need for absolute returns makes them especially volatile. So if you don’t have the stomach for such returns, you’d do better to stay away from these funds.
Like any traditional fund, a hybrid fund also own stocks or bonds. What’s different is that they may also bet on share prices falling by using hedge fund techniques like "shorting" stocks. This earns them profit from declines in the stock market. So why should anyone go in for a hybrid mutual fund instead of a hedge fund? Here’s why:
- Any hedge fund has an entry fee of at least $1 m. Not everybody has that kind of disposable money. Hybrid funds require you to pay around $25,000.
- With a mutual fund, you have access to the net asset value of your fund on a daily basis. This means you can add or withdraw money daily. This facility is not available with hedge funds, which usually have longer waiting periods during which you cannot get your money. So liquidity is at a low with hedge funds.
- Another big advantage is that with a hybrid mutual fund, you may have to pay hefty annual fees, but you will not have to give the fund a cut of your profits – whereas with hedge funds, you may have to shell out not only a fee, but also around 20% of any profits. There are more benefits, which I will write about later.
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