Funds Hub

Hedge funds vs mutual funds

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.

Hedge funds took some heat from the credit crisis as liquidity and transparency became critical factors in investment decision-making. It’s fair to say hedge funds continued to deliver decent returns to investors, but how do they compare to mutual funds if we focus on performance and risk alone?

In 2008, the average return for mutual funds stood at a negative 22.91 percent. At the same time, hedge funds posted average returns of minus 8.37 percent. We might have expected a stronger rebound for mutual funds in 2009 and 2010 than for hedge funds, yet the data shows better average returns for hedge funds in both years. Positive returns in the sector stood at 22.36 percent and 18.08 percent respectively against 21.16 percent and 10.23 percent for mutual funds.

If we look at performance over a longer time frame, mutual funds posted annualized returns of 2.07 percent over 3 years and 1.85 percent over 10 years while hedge funds recorded returns of 8.81 percent and 3.77 percent respectively.

We have a different story on the risk side. Part of the appeal of hedge funds is that they seek to actively manage volatility, but managers struggled to keep volatility under control during the credit crisis. The 3-year annualized standard deviation was higher than mutual funds (19.19 percent against 16.65 percent) and the 10-year figures showed similar results (16.80 percent against 12.44 percent).

If we go deeper into the data, we can note that volatility is strongly linked to the asset class for mutual funds while at the same time performance and volatility are positively correlated. As a simple example, a bond category will tend to have lower volatility and lower performance than an equity category. And likewise, an aggressive diversified fund will likely to have higher performance and volatility than a conservative diversified fund.

To view a graphic of the performance data, click on this link.

from Reuters Money:

Actively managed ETFs and other wrinkles

The following is an edited excerpt from Never Buy Another Stock Again: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity, written by David Gaffen, who is the Reuters markets editor. It was printed with permission of FT Press, an imprint of Pearson.

One of the biggest growth industries in finance right now is in exchange-traded funds, and further growth in ETFs appears likely to come from several places.

Sector or country-specific ETFs and actively managed ETFs are likely to continue to be a growth area, along with perhaps a combination of the two (an actively managed ETF focusing on small-cap stocks, for instance).

The most popular sector ETFs are in natural resources and technology, although State Street, which sponsors the SPDRs ETF, has S&P sector ETFs for nine of the ten S&P sectors (telecommunications is the lone exception—it’s folded into another area); new ones continue to crop up.

For professional investors attempting to beat the market, they’re an ideal vehicle because they carry a relatively low cost and have tax efficiency, as David Kotok of Cumberland Advisors has pointed out. But John Bogle, in his book “The Little Book of Common-Sense Investing,” quoted (anonymously) a chief investment officer at an ETF company cautioning against “pin-pointed” bets on sectors, because they “still involve nearly as much risk as concentrated stock picks.” But that doesn’t mean they’re going to stop growing.

Like mutual funds, tech stocks, tech funds, and other hot investments that dominated the landscape for a time, the ETF world is turning into its own “app economy,” as Nicholas Colas, chief market strategist at BNY ConvergEx Group, puts it. This, by itself, is not necessarily a bad thing, but with more choices comes more confusion.

Another area where one can expect a growth spurt is in actively managed ETFs, first introduced by investor Harry Dent with his Dent Fund through AdvisorShares, which is now marketing other new actively managed exchange-traded funds. And so ETFs are starting to come full circle: While this is still designed for the same kind of tax efficiency and liquidity offered as most ETFs, now investors have the (supposed) benefit of active management—but the higher expenses to boot.

from Reuters Money:

Green investing with mutual funds

Tom Roseen is the U.S. and Latin America Research Manager at Lipper --  a Thomson Reuters company that supplies mutual fund information,  fund ratings,  fund analytical tools and fund commentary.

Even if you don’t buy into the global warming argument, you’re probably still interested in finding ways to reduce your gas and oil costs, keep the air breathable for you and your family, and benefit from the global momentum to clean up our planet. So are others.

Current skepticism about our global energy supply and the deleterious impact of fossil fuels on the ecology make investing in alternative energy sources an attractive option, especially for the long haul. While the recent state of the economy has derailed both private and public investment in green technology, experts predict an over-twofold increase in sales growth for this group by 2019.

Many of us wonder how we can get in on the ground level of the new technology and the advancements in alternative energy sources: wind power, solar power, geothermal energy, nonfossil fuel-biomass energy, and hydroelectric energy. But new and burgeoning businesses providing these energy sources may sometimes be difficult to research and even more difficult to understand.

Engaged and experienced investors can go the route of picking individual green stocks to add diversification and exposure to their portfolio. Those of us who wish to benefit from this aspect of socially responsible investing but don’t have the time or expertise to pick the right stocks have the choice of turning to green-focused mutual funds and exchange-traded funds (ETFs) — so-called green funds.

Currently, Lipper tracks 25 funds in 12 different categories that have a main screening criterion or investment strategy based solely on environmentally friendly investments. However, only 17 of the 25 are funds that purchase the stock of firms actually involved in creating or producing the alternative energy sources listed above. These “pure play” green funds or true alternative energy funds are found in Lipper’s Natural Resources and Global Natural Resources fund categories.

Because of the hangover from the 2008 market rout, the continued economic malaise, and the Congressional impasse on sweeping energy proposals, many of these funds have suffered quite a bit more than other funds in the same categories. For the one-year period ended September 30, 2010, the average (non-green) Global Natural Resources fund posted a 3.38 percent return, while the average green fund in the same category lost an average of 18.35 percent.

from Reuters Money:

Fund managers see value in energy stocks

For equity investors, 2010 has yet to deliver the "fun" to fund investing.

The average stock fund has lost 3.5 percent so far this year, according to Lipper, a Thomson Reuters company. And the funds that are at the top of the performance charts thus far this year are typically taking a defensive stance.

One such defensive portfolio is the Ave Maria Growth fund, which is up 4.86 percent through June 23. According to Lipper, top holdings include defense contractor General Dynamics, retailer Coach and tech giant Hewlett-Packard.

Manager George Schwartz says he has been underweight in the energy sector thus far, but he is looking to increase the portfolio's stake in energy and oil stocks. "They are inordinately cheap right now," Schwartz says. While the fund has a 3.4% position in Occidental Petroleum, "Halliburton and Schumberger are great companies that aren’t in this portfolio, but could find their way in," says Schwartz. "The value is definitely in energy patch today."

Indeed, several mutual fund managers at the Morningstar  Investment Conference in Chicago this week said they are looking at energy stocks, including oil giant BP Plc, which has lost about half of its value since the April oil spill.

Which begs the question: Is offense the best defense?

from Summit Notebook:

Tax evaders on the run

  By Neil Chatterjee     The U.S. has promised it will hunt down tax evaders.     And it seems tax evaders are on the run.     DBS bank, based in the growing offshore financial centre of Singapore, told Reuters it had been approached by U.S. citizens asking for its private banking services. But when told they would have to sign U.S. tax declaration forms, the potential clients disappeared.       Swiss banks also approached DBS on the hope they could offload troublesome U.S. clients to a location that so far has not been reached by the strong arms of Washington or Brussels.     DBS said no thanks. In fact many private banks and boutique advisors now seem to be avoiding U.S. clients.     Will this spread to other nationalities, as governments invest in tax spies and tax havens invest in white paint?     Is this the end of offshore private private banking?

Reuters Fund Summit: Will hedge fund regulation open the door to retail investors?

By Huw Jones

Hedge funds are nothing if not optimistic – they have to be in the current climate.

While holed up in an English country resort last weekend, finance ministers and central bankers from the G20 group of countries agreed that the $1.4 trillion hedge funds sector should be made to register, be directly supervised and provide information about their holdings to regulators who track risk in markets.

Mutual funds gaining ground on hedge funds?

Hedge funds have gained a increasing share of the investment pie in recent years but the trend could could be reversing, judging by separate comments made by UBS and Deutsche Bank on Tuesday.

Timothy Bell, global head of hedge funds advisory at UBS Wealth Management, said hedge fund assets could fall further to $1.2 trillion this quarter from $1.4 trillion at the end of 2008 and $1.93 trillion at their peak in mid-2008.

At the same time, Deutsche Bank’s DWS unit said it saw inflows into its Asian mutual funds in the first six weeks of 2009.