• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>Five Mutual Funds to Help You Hedge

Related Content

  1. Videos
  2. Articles
  1. Top Investment Ideas for Retirement

    Retirement Readiness Bootcamp Part 5: Morningstar strategists share their top fund, ETF, and dividend stock picks to fill your retirement portfolio.

  2. Sharpen Your Portfolio Plan for 2014 and Beyond

    Roundtable Report: At the outset of 2014, Morningstar strategists dig into the market's current valuation and expected return, seek out high-quality U.S. and foreign stock opportunities, size up the role of cash today, assess the Fed's impact on the market, and reveal the best ways to fight inflation.

  3. Why Vanguard Was Hard to Beat in 2014

    It was tough for active managers to outpace Vanguard's low-cost index funds in 2014, and many of its active funds also outperformed.

  4. The Picks Panel: Best Ideas From Morningstar Analysts

    Whether you need to fill a hole in your retirement portfolio or want to find a world-class company at a bargain-basement stock price, a trio of Morningstar specialists share their shopping lists of topnotch candidates.

Five Mutual Funds to Help You Hedge

Is it time to buy a little mutual fund insurance?

Russel Kinnel, 08/25/2009

Now that's a rally! Things don't look so gloomy after the great spring and summer rally we enjoyed. Many say that the market is now fairly valued, so the great fire sale is over.

The economy has improved tremendously but some people expect another slowdown. 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 also rising inflation. If it doesn't, we could have deflation and be stuck in a rut like Japan in the 1990s.

When stocks were supercheap and commodities superpricey, there weren't many hedges that I liked, but now it seems reasonable to consider them. Here are some funds that could hold up well if we get a bout of disappointing news.

Harbor Commodity Real Return HACMX
If inflation comes back, this fund could provide some protection. I particularly like it for portfolios that are heavily weighted to fixed income and, therefore, are vulnerable to a spike in inflation. Run by PIMCO in a fashion similar to  PIMCO Commodity Real Return Strategy PCRDX, this fund tracks a basket of commodities and then adds in a Treasury Inflation-Protected Securities overlay that effectively gives you exposure to TIPS as well as commodities. We recommend the Harbor fund over the PIMCO fund because of its low expense ratio. Beware of the fund's volatility and be sure to keep it to a single-digit weighting in your portfolio. Ideally, it should be held in a tax-sheltered account.

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 recently fell to 1.04%.

Calamos Market Neutral Income CVSIX
The implosion of hedge funds makes this fund more appealing. The three Calamoses (Calami?) 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. They also write covered calls.

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
This is the boldest of the funds here. 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 July, the fund was 47% long equities, 17% short, 3% in options, with the rest in bonds and cash. Although Orkin sometimes zigs when he should zag, the long-term performance is excellent.

©2017 Morningstar Advisor. All right reserved.