It's not a hedge fund, but for Charles Schwab ( SCH) customers looking for ways to profit in a bear market, it may be the next best thing. On Wednesday, Schwab, the nation's biggest discount brokerage, rolled out a new mutual fund that will try to beat the major market indices by going both long and short on U.S. stocks. In other words, the fund will make bets that some stocks will rise while others will fall. The new fund is Schwab's response to the growing investor demand for investment vehicles that can make money in a slumping market. And it comes nearly a year after the San Francisco-based brokerage said it was considering making hedge fund-like investments available to its 8 million customers. The debut of the Schwab Hedged Equity Fund also comes at a time that all Wall Street firms are looking for new ways to keep their customers happy and from pulling money out of the market. On the same day Schwab was announcing the new fund, it also confirmed it may have to lay off more employees because customers remain wary of investing in stocks.
Over the past year, Wall Street firms ranging from Merrill Lynch ( MER) to Neuberger Berman ( NEU) and Raymond James Financial ( RJF) have been diving into the hedge fund world and offering a smattering of so-called alternative investments to their customers. Still, the debut of the new Schwab fund, which starts trading on Sept. 2, is being cheered by financial planners, who say it gives investors another piece of armament to protect their portfolios from being mauled in a bear market. "The timing of this launch is curious because of the weakness in Schwab's revenue numbers, but it does offer investors another way to diversify their portfolios," says Anthony Vargo, a financial planner with Legend Financial Advisors of Pittsburgh. Like a hedge fund, the new Schwab fund will have the ability to make bets that stocks will fall in price -- something a traditional mutual fund can't do. But unlike a hedge fund, which are loosely regulated private partnerships, the Schwab investment fund will be subject to the same kind of regulatory oversight as any other mutual fund. The Schwab fund has one other advantage over a hedge fund. It's a lot cheaper for investors to jump into. The minimum investment in the new Schwab fund is $25,000 -- far less than the standard $500,000 entry fee required by most hedge funds. That's why hedge funds, despite all the attention they're getting for outperforming traditional mutual funds, largely remain the stomping ground for the rich and famous. But Schwab is by no means the first Wall Street firm to try and follow the investing strategy of the $550 billion-hedge fund industry. In fact, so-called long/short mutual funds have been growing in popularity for several years. Morningstar, the mutual-fund ratings service, say there are now more than two-dozen long/short funds, but most are small funds with less than $100 million in assets.
It's easy to see why mutual funds that can short stocks are so popular. The CSFB/Tremont Hedge Fund Index, which tracks the performance of 375 hedge funds, is up 1.34% for the year. That may not sound like much, but it's a lot better than the double-digit losses being posted by most traditional mutual funds and the 25% slide in the S&P 500 this year. A separate CSFB/Tremont index that measures the performance of long/short mutual funds is down less than 1% for the year. In fact, Standard & Poor's says five of this year's top-performing mutual funds are ones that employ short-selling strategies. S&P says the total return on the five funds was about 29%, compared to a 12% decline for the typical mutual fund. Of the funds tracked by S&P, the top gainer is the ( BRMIX) AXA Rosenberg: Value Market Neutral/INV , up 31% through July 26. But financial planners say that even in the worst bear market, investors shouldn't put all of their assets into a hedge fund or a mutual fund that can short stocks. It's better to use these as alternative investments to balance out other holdings in an investor's portfolio. "I would not recommend that clients be dominated with a long-short strategy," says Vargo. "It should be used to complement traditional investment classes."