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Diversify Your Portfolio, Diversify Your Investment Strategies
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Interested in protecting yourself from market fluctuations? Don’t want to stuff your money under the bed, but can’t bear the thought of it disappearing over night either? While many turn to treasury bills or savings accounts, there is another safe investment investors have used over the years.
The market can turn in either direction and your money can still be safe in a Market Neutral Fund. While technically it is a hedge fund, here “hedge” means less risk instead of more. Many folks run when they first hear the term “hedge fund.” Market neutral means that for every company that the fund owns shares of, they have sold shares "short" in another company that they feel will do poorly in coming months. So if the market goes up, the "long" positions increase in value, and if the market goes down, the "short" shares become more valuable and the net value of the fund stays about the same. So, a market neutral fund uses the short position to directly hedge a corresponding long position. During this crazy time in stock market history it is important to protect yourself from wild market fluctuations and not have to stress over when and where the next jump might be. So if the Dow goes to 4000, wouldn't it be nice to know that your portfolio would still be worth the amount that you originally invested.
You may be thinking if the fund is always neutral, how do I make any money? The profits you make don’t depend on the overall market, rather the stocks, the actual companies you are invested in. As long as you pick longs that outperform the market, and shorts that perform below the market, there are profits to be made.
Would it be safer to stick with a mutual fund? Many market neutral hedge funds made money in 2008, while most all traditional mutual funds lost 20 to 40%. How can this be? Mutual funds tend to choose long stocks and therefore most of their profits are tied to the increase of the market as a whole. This strategy has worked well over the long haul as the market has generally increased over any twenty-year period. However in this market, your guess is as good as mine for which direction it might jump. You may actually be able to sleep better at night knowing all your eggs aren’t in one type of basket.
It is nearly impossible to determine where the market will go next, and not to mention the knots in your stomach when you’ve invested all you have. When you are fearful for the stability of the market, it is a good time to look into different strategies like a market neutral fund. The first thing you learned was to diversify your portfolio, now diversify your investment strategies.
Emily Dawson
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