Is Your Mutual Fund a Hedge in Disguise?

By Mark Jewell, AP Personal Finance Writer

BOSTON (AP) — Do you worry more about protecting your money than seeing it grow? If your answer is yes, maybe you should be in hedge funds — or at least try to emulate them.

That may sound preposterous if you regard hedge funds as a speculative realm of the wealthy. But from a strategic standpoint, many of these investing refuges of the rich are more conservative than the average mutual fund.

Many mutual fund companies — including big names like Pimco, Vanguard and Fidelity — are trying to spread the word that average investors can benefit from the often complex strategies that hedge funds pioneered to hedge risk while also enhancing returns.

Until a few years ago, those strategies were mostly limited to hedge funds, which often require clients to have a net worth of at least $1 million. At mutual funds, the same strategies are available to individuals with as little as $2,500 to invest.

There are roadblocks. These alternative strategies can get so complex many investors may lack patience to even understand them. Such strategies can also lag in market rallies, and the costs from frequent trading and the funds' typically high management expenses can offset the protection they offer in lousy markets.

But the safety argument is winning plenty of converts. Nearly 200 mutual funds using alternative strategies or investing in alternative assets have launched over the past five years, according to Cerulli Associates. The industry researcher defines alternative broadly, including hedge fund strategies like arbitrage and leverage, ranging to commodities investing, private real estate and venture capital.

The alternative funds' $144 billion in assets isn't huge, although it's up fivefold since 2003. The total is around 2% of mutual fund assets overall.

Financial planner Cliff Caplan fears conventional approaches will leave his clients exposed the next time the market tumbles. That includes moving heavily into bonds, which took an uncharacteristic hit in 2008's meltdown. So he's recently shifted nearly a quarter of his clients' assets into alternatives.

"I'm adding lots of cushion to portfolios — a lot," says Caplan, president of Neponset Valley Financial Partners in Norwood, Mass.

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