Mutual Funds That Hedge Top Ratings List

Major positions of JAMNX include McDonald's(MCD Quote), International Business Machines(IBM Quote) and CSX(CSX Quote).

The Arbitrage Fund(ARBFX Quote) engages in the classic hedging strategy of capitalizing during a corporate merger on the spread between an acquired company's stock price and the proposed acquisition price. A merger-wise manager can profit by deftly shorting the stock of the acquiring company and using the proceeds to buy shares in the target firm.

The head of a mutual fund once quipped that he wasn't getting an equity manager's pay for rolling over a portfolio of Treasury bills. And in keeping with that approach, equity funds generally maintain modest percentages of cash reserves. Even balanced and asset-allocation funds tend not to lean heavily on cash.

But, then, knowledgeable investors have learned not to expect the ordinary from an investment associated with the Gabelli organization.

"The investment seeks long-term capital appreciation," says Gabelli's GAMCO Mathers Fund(MATRX Quote), in an understatement prefacing its more ambitious intentions. "The fund usually invests a substantial portion of assets in common stocks; it may, however, invest all or any portion of assets in fixed-income securities," clarifies the fund. "Securities of unseasoned companies, foreign issuers, and special situations may provide suitable opportunities for investment. Investments may also include corporate debentures or notes of any credit quality, preferred stocks, and convertible securities."

MATRX was, most recently, 99.76% in the unexciting area of cash and equivalents. But that subdued investment selection was providing a modest return to investors during a period when stock prices were crumbling before investors' eyes. Its cash hoard provides the fund with ample ammunition to participate in an eventual stock market recovery.