Alternative Investments and Mutual Funds

Kurt Brouwer June 28th, 2007

Murray Coleman, a reporter at MarketWatch has a piece on the upcoming Morningstar investment conference. In it, he covers the trend towards alternative investments in mutual funds.

‘…”A key theme we’ll be taking a look at is how people are moving away from traditional mutual funds to diversify their portfolios even more,” said Don Phillips, Morningstar’s managing director.

Financial advisers are increasingly finding that bond funds move more in sync these days with stocks than in the past, he added. “Rising correlations between stocks and bonds are creating an ardent search today for asset classes that will zig when stocks and bonds zag,” Phillips said…’

By way of background, the term ‘alternative investments’ covers a pretty broad spectrum of specialized investment strategies. Examples include: venture capital funds, hedge funds, buyout or private equity funds and so on. In particular, mutual funds are beginning to include hedging strategies such as those used by hedge funds. Even the term hedge fund is pretty broad because is includes high-risk, leveraged strategies as well as low-risk, ‘hedged’ strategies.

The first mutual funds invested in straightforward portfolios of stocks or bonds or a combination of the two asset classes. Later on, came money market mutual funds, gold funds, real estate funds and even funds of funds. But, mutual funds stayed away from more complex strategies such as traditional ‘hedged’ strategies such as long/short hedge funds. This approach seeks to profit when the market goes up or down. The fund buys some stocks they think will go up and shorts (or sells) other stocks they believe will go down.

After some regulatory changes a few years ago, mutual funds began moving into more complex and specialized investment strategies that we associate with hedge funds. Here are three very different funds that represent examples of this trend:

The Merger Fund (MERFX)

Legg Mason Opportunity Trust (LMNOX)

Wintergreen Fund (WGRNX)

We expect this trend toward more specialized investment strategies for mutual funds to continue over the next few years.

 

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