Yes, I know. Not “every investor” can invest in hedge funds. But that doesn’t mean they can’t invest in mutual funds that are managed like hedge funds.

marketvolatilityTo clarify my point, the typical hedge fund may bet on falling prices by taking short positions in securities and it may also take long positions to benefit from rising valuations. In summary, hedge funds use leverage to hedge against market declines.

Ideally, the hedge fund will consistently produce returns that outpace inflation, even in years when other assets are declining in value, such as in bear market corrections.

But membership has its price: Hedge fund investors are typically required to have a high net worth, such as $1 million or higher, and fees are often around 2% of assets plus 20% of profits.

Mutual Funds That Invest Like Hedge Funds

Fortunately, for most of us everyday investors, there are a handful of mutual funds that are managed like hedge funds and they have reasonable expenses and affordable purchase minimums:

  • Hussman Strategic Return (HSTRX): John Hussman, the manager of this hedge-like mutual fund portfolio, is known for predicting the 2008-2009 recession and his weekly Hussman Funds market commentary is widely read by investors, money managers, and financial media pundits. As you might expect, HSTRX delivers solid downside protection. For example, year-to-date through Jan. 20, HSTRX was up over 4.27%, whereas the S&P 500 Index was down 1.70%. And in the throes of the last bear market, in 2008, HSTRX had an impressive 6.34% gain, while the S&P 500 sank 37.0%. Making this fund more attractive and accessible to everyday investors, Hussman Strategic Return has a low expense ratio of just 0.63% and a minimum initial purchase of only $1,000.
  • TFS Market Neutral (TFSMX): This fund is among the best in the market-neutral category of funds, which attempt to reduce or “neutralize” market risk with a combination of long and short positions. Although TFSMX took a slight 7.29% dip in the depths of the 2008 bear market, the fund ranks highly against category peers with performance at least in the top 10% of market-neutral funds for 1-year, 3-year, 5-year, and 10-year returns. Therefore, if you don’t mind a small amount of downside risk, you may capture more of the upside with TFS Market Neutral. The expense ratio is above average at 2.02% and the minimum initial investment is $5,000.
  • InvestEd Conservative (WICAX): Not many mutual funds can brag about achieving positive returns for 10-plus consecutive years,  but this fund from Waddell & Reed has earned such bragging rights. Making the prospects for future performance just as bright, the same lead manager, Michael Avery, has been at the helm of InvestEd Conservative since the fund’s inception more than 13 years ago. While investors shouldn’t expect high short-term returns with WICAX, they can expect low volatility and consistent gains. The 10-year annualized return is a decent 5.17% and the expense ratio is below average at 0.95%. Although WICAX has a front load of 4.25%, the solid management can be worth the price. Some investors may also qualify for the load-waived version. The minimum initial purchase for WICAX is a cheap $750.

To take advantage of tactical asset allocation funds and market-neutral funds like these, investors do not need to try absolute market timing by moving all of their investment assets into them. Instead, they may be used as core holdings for a diversified portfolio.

So investors looking to capture some of the upside potential remaining in this market while protecting against the downside can consider these mutual funds that act like hedge funds.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

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