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bear funds

Hedging Your Mutual Fund Portfolio - Why Hedge Your Portfolio?

What do farmers and airlines know that you don’t?

So far in our series on managing risk we’ve taken a look at market timing and portfolio diversification as two powerful techniques to control risk in our mutual fund portfolios. In this article we’ll take a look at the third and final one: hedging.

Bear Market Investing - Hedging with Mutual Funds and ETFs

In previous articles we covered the possible advantages of hedging your portfolio as another way to reduce risk. This time we will cover a method to do exactly that using only mutual funds or ETF’s that can be purchased in a cash brokerage account.

Historically to hedge you had to sell short shares of an ETF that tracks the market, like SPY or QQQQ, or to buy put options on the major indices. The problem with that is that it requires a margin account, which eliminates most retirement accounts, and many retail accounts. Plus many people have this innate fear of short selling, and are concerned that they could lose more than they invested if the markets were to take off.

Fosback Seasonality Timing System

We would all like to have some edge when it comes to the markets. We have discussed some stock market timing approaches as one way to mitigate the market risk. However, one limitation almost all these market timing systems have is that they are the result of some type of backtesting or simulation. The result is that while it may look good on paper, it’s difficult to have much confidence in their real time performance until they develop something of a track record.

Hedge Mutual Funds - Making Sure Your Mutual Fund Hedge is Working

In volatile market times like those we have had recently, there is a natural increase in interest in hedge mutual funds as a way to protect capital in turbulent times. We surveyed a sample of hedge mutual funds in the past, highlighting a sample of funds that use a variety of techniques to mitigate market risk as part of a hedging strategy. Recently ING has introduced another variant of hedge mutual funds, the ING 130/30 Fundamental Research fund.

Bear Funds - Bear Mutual Funds and ETFs

As we discussed in our previous article on our hedged mutual fund portfolio when the market is moving against the bulls as quickly as it has been recently, its time to take another look at risk management strategies, and in this case specifically hedging strategies. There are a number of ways to hedge your mutual fund or ETF position, but our favorite is the use of bear funds or bear ETFs.