Mutual fund companies' high hopes for marketing hedge funds with low minimum investments, also known as long-short funds, to shareholders with modest means are gradually fading as the asset class continues to attract only lackluster sales, Investor's Business Daily reports.
The 70% growth in traditional hedge funds between July 1999 and year-end 2003 has far outstripped the modest 27% increase of long-short fund assets during a one-year period ending July 31. At the end of 2003, the hedge fund industry controlled $840 billion, whereas long-short funds collectively held $7.6 billon in July, according to Lipper.
During a one-year period ending last week, long-short funds' 6.29% average performance lagged the 9.61% track record for the Standard & Poor's 500 index during the same period.
Long-short funds got an original boost in 1997, when a tax law change allowed ordinary mutual funds to engage in short-sale strategies on a limited basis. Soon afterward, investors had a selection of more than 230 ordinary mutual funds employing short-selling tactics. Soon after, mutual fund providers like Rydex and Profunds quickly popularized bear market funds, which capitalize on down markets with short positions.
However, recent market rallies have dampened enthusiasm for sales of long-short funds and bear market funds. Nonetheless, these investments are gaining renewed interest as market conditions are becoming increasingly volatile. The $1.7 billion Merger Fund appears to be one of the winners in this down market cycle. The fund, which has outperformed the Standard & Poor's 500 Index so far this year, closed to new investors due to an influx of new assets in 2001 and 2002.