Many mutual funds and closed-end funds have tried to mimic successful hedge fund strategies. However, at the end of the day, they are still not hedge funds, according to BusinessWeek. Now, individuals who desire hedge fund-like returns and are willing to take the risk, are buying shares in companies that invest similar to hedge funds.
Under laws that mutual funds are governed by, they are not able to borrow an amount of money exceeding one-third of their assets. This limits their ability to sell short stocks that they think are going to decrease or increase on those they think are going to rally.
Greenlight Capital is a reinsurance company that sells insurance policies to other insurers, collects premiums, and invests in the proceeds. Normally, reinsurers invest in bonds, but not Greenlight.
Greenlight’s money is managed by DME Advisors, the $4 billion hedge fund in New York run by David Einhorn. Einhorn uses both long and short strategies in equities and corporate bonds. He also uses futures and options that can increase its gains or losses.
The portfolio beat the Standard & Poor’s 500 Index in 2005 and 2006. The first quarter of this year was not as successful. The portfolio lost 4%, while the S&P rose almost 1%, but it rebounded in April with a 3% gain. As of the last quarterly statement dated March 31, Greenlight is still an insurer, and losses on policies cold eat into investment gains.
Another company, Cypress Sharpridge Investments, a real estate investment trust that is projected to go public this summer, invests in prime residential mortgage-backed securities, collateralized debt obligations and other asset-backed securities. A few mutual funds do this as well, but not on the same scale as Cypress.
Cypress is co-managed by former Fidelity Investments bond fund manager Kevin Grant, who currently runs a mortgage-backed securities hedge fund and Cypress, a leveraged buyout firm.
It is not yet known what hedge fund-style results these companies will produce, and investing in them should be done cautiously.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.