Hedged Mutual Funds Pros and Cons

Hedged mutual funds are a relatively new form of investment option for the average investor – previously only available to clients of large institutions.  There are a few pros and cons with the use of hedged mutual funds and it is highly advised that one gains a thorough and clear understanding of this type of investing strategy before taking part; the advice and expertise of a qualified financial expert, adept in hedged mutual funds, would be the ultimate security however.  Probably the biggest selling point for hedged mutual funds is that they can offer returns similar to those gained on the stock market without some of the high risks that market investors experience.  They are also more simply managed than the traditional hedge fund and the length of investment is likely to be of shorter duration.

One advantage of hedged mutual funds is the relatively low cost of implementing them – a lower asset management fee makes them a more viable option than traditional hedge funds.  It is not standard for a performance fee to be charged either; on some types of similar investments, up to 20% can be charged to manage a fund for a client.  There is daily evaluation and liquidity on the fund and the tax laws involved with hedged mutual funds usually make them less complex to deal with.  Hedged mutual funds overall are a clearer and more transparent way of investing and tend to avoid some of the complexities and involved systems of other investment funds.  A certain fluidity with hedged mutual funds make them a good strategy for use in portfolio diversification and with risk management in potentially volatile market conditions. 

The usual actively managed mutual fund will likely attract lower maintenance fees in many cases thus making hedged mutual funds a less attractive option for some.  For less savvy investors, hedged mutual funds can be very difficult to manage owing to the complexities involved with this type of investing – money can be lost quite easily when the market is in a downturn.  Certain investment laws, not pertaining to more highly regulated types of hedge funds, can make hedged mutual funds an unattractive proposition for some investors.  Effective investing with hedged mutual funds requires a sophisticated knowledge of hedge fund strategies – as yet, there is no general consensus in the financial world concerning how effective and successful this type of investing strategy is.