Mutual funds are increasingly capitalizing on the popularity of hedge funds by availing themselves of some of the same investment tools used by their lightly regulated hedge fund cousins.
But while betting on declines in stock prices helped make some hedged mutual funds make money during the bear market, many of these same portfolios are trailing the market on the way back up.
The $762 million Calamos Market Neutral/A (CVSIX), for example, is a mutual fund that invests in convertible bonds — securities paying fixed returns but which can be converted into common stock at a set price. Rather than just hold the bonds in the expectation that their prices will rise, however, the fund hedges its bets by selling the stock short. That way, if convertible prices decline, it can offset the losses with money it makes on the short positions.
Closed to new investors since November 2001, the fund has produced annualized returns of 9.11% over the past five years, beating the Standard & Poor’s's 500-stock index by 10.60 percentage points. But it gained just 3.63% in the first half of 2003, compared with a 12.56% rise in the S&P 500, as the fund’s short investments have cut into gains for the year.