Individual investors who want something more than a plain-vanilla investing plan are increasingly trying out a new option: mutual funds that use hedging strategies.
While a standard mutual fund looks for companies with good financial performance and waits for those stocks to rise, a hedgelike mutual fund flies into special situations.
It can be aggressive, betting that stocks will fall or trying to pick takeover targets.
The primary goal of hedging one's investment bets is to have positive results whether the market is up or down. When stocks are high, hedge funds may not produce impressive results.
But during big market downturns, analysts say that hedge-like mutual funds can reduce risk.
"When you really want diversification to work, of course, is when the market goes haywire. Not just the usual up and downs," said Andrew Clark, senior research analyst for Lipper Inc., a mutual fund analysis firm.
Fivefold increase
Investors are pouring lots of money into them. Assets in one of the most popular categories, long-short mutual funds, rose to more than $19 billion by March, a more than fivefold increase from $3.6 billion at the end of 2001, according to Financial Research Corp. of Boston.
By comparison, the assets of all mutual funds increased 1 1/2 times in the same period.
Until recent years, only wealthy people had access to hedge funds.
Those aren't mutual funds at all, but instead are private pools of money with few restraints on what they can invest in.
The Securities and Exchange Commission limits access to investors who have at least $1 million or a high income. The hedge fund can lock up the investors' money for two years or more. And there have been some spectacular failures, such as Amaranth Advisors LLC's collapse and loss of $6 billion in one week last year.
But with the advent of hedge-like mutual funds in recent years, ordinary investors can get into - and out of - this growing class of funds.
Certified financial planner Jay Shein, head of Compass Financial Group in Deerfield Beach, Fla., suggests that the best way for individual investors to get into the niche is to buy shares in a so-called fund of funds, which combines several hedging strategies.
Hedgelike mutual funds trade just like ordinary mutual funds and can have small minimum investments.
"I look at hedge funds both as a risk-reducer and a return-enhancer," Shein said.
