Long-Short Funds Catching On

Long-short mutual funds have gotten more popular with investors in the last few years, as they increasingly look for low-volatility returns in an unpredictable market.

Long-short mutual funds have gotten more popular with investors in the last few years, as they increasingly look for low-volatility returns in an unpredictable market. In July, assets in these funds hit $14 billion, according to data from Financial Research Corp. The funds first started to proliferate in 1997 after a tax-law change gave mutual funds more leeway to short stocks.

Long-short funds are often confused with market-neutral funds, but there is an important difference: Whereas market-neutral funds balance their short positions with their long positions, giving them a net exposure to the broad market of zero, long-short funds either have a consistent long bias or tend to adjust their long-short mix tactically over time.

The nice thing about long-short funds is they give smaller investors access to hedge-fund like strategies without the high minimums and lack of transparency that you typically get with a hedge fund or fund of funds. They're also less expensive than hedge fund of funds. That said, they don't come cheap. Some long-short funds charge as much as 4 percent, compared with around 1.47 percent for the average U.S. equity mutual fund. Plus, their returns have been kind of run-of-the-mill of late. Over the past three years, a period when the equity markets have performed relatively well, long-short funds were up only 7.5 percent a year on average, according to Morningstar.

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