Though President Trump’s support toward the extension of the debt limit deadline might have helped stocks book modest gains on Sep 6, a slew of headwinds will continue to spook investors in the month of September. Investors are expected to grapple with issues pertaining to North Korea. The rogue nations’ testing of its deadliest ballistic missile had sent shock waves through Wall Street, while drawing widespread rebuke from across the globe.
A potential catastrophic hurricane Irma and persistent worries about elevated stock valuations also raise concerns for investors. A record number of fund managers see the U.S. market as the most overvalued in the world. Among the 20 valuation metrics tracked by Ned Davis Research, 16 of them indicate that the U.S. stocks are extremely overvalued.
As if all this wasn’t enough, September is historically the worst month for the stock market. Weighing all the cons, alternative mutual funds seem to be the best way out for investors. Such funds are known for their potential to hedge risks, provide unwavering returns particularly in difficult times and a diversified portfolio.
What Are Alternative Mutual Funds?
These funds mostly include long/short equity funds, market-neutral funds and trading-leveraged equity funds. These types of funds are available to investors of all income groups. Let us now discuss the three types of funds in some details.
Long/Short Mutual Funds
Equity long/short funds seek to gain from both winning and losing stocks, irrespective of the market scenario. These funds use conventional methods to identify stocks that are either undervalued or overvalued. It profits from shorting the overvalued stocks and buying the undervalued ones. Weights are subject to change and are dependent on management’s view on the market.
For example: Say an investor buys a long/short mutual fund for $100, then the fund manager will invest it in assets that are expected to fare well. The manager shorts $30 in stocks that are believed to be overvalued. In the process, he receives $30 in cash. He will now use the $30 to buy more assets with an upside potential. Thus, now he has a total of $130 invested in long positions and $30 in short positions. This type of long/short fund is called a 130/30 mutual fund.
