As always I appear to have been early to a trend ;) I really need to get going before the Fidelity's and Vanguard's flood the industry with these type of funds...

Via Bloomberg:

  • JPMorgan Chase & Co. and Pacific Investment Management Co. are inundated with money from individuals attempting to mimic the performance of hedge funds speculating that the stock-market rally is over.
  • So-called bear-market and long-short mutual funds, designed to protect against falling stock prices, attracted a record $10 billion this year through October, more than double the previous high in 2006, according to Morningstar Inc.
  • Asset managers have opened 19 long-short funds, the most in one year.  Long-short funds buy stocks as well as sell them short. In a short transaction, the investor sells borrowed shares in a bet that the price will subsequently fall and the stock can be purchased and the loan repaid at a profit. These funds hold more long positions, or those that make money when prices rise, than shorts.
  • Conventional mutual funds that only buy U.S. stocks posted $4.6 billion of redemptions in the first 10 months of the year, while bond funds added $280 billion.
  • Most conventional mutual funds don’t short stocks.  (most investors think mutual fund can't short... not true at all, the industy is staid, fat, and happy to do what is easy - after all the same 10-12 families control the entire 401k market so why bother to take a 'risk'?)
  • The best-seller among the funds is Hussman Strategic Growth, run by economist John Hussman of Ellicott City, Maryland. It drew $1.7 billion through September after limiting its loss last year to 9 percent, according to Morningstar, less than half the average of hedge funds.  (Hussman, who has a very risk averse model, was also an Economics professor at the University of Michigan either while I was there, or right after - can't tell from his bio.  It would be sort of funny if I took one of his courses... can't remember, at worst crossed paths within a year or two of each other)
  • The $3.4 billion Highbridge Statistical Market Neutral Fund, run by JPMorgan’s Highbridge Capital Management LLC, pulled in $1.5 billion. At Pimco, the world’s largest bond manager, Bill Gross’s Fundamental Advantage Total Return Fund raked in $786 million, Morningstar’s data show.  (these numbers are simply staggering)
  • The alternative funds have been around since at least 1977 and had sales increases after the dot-com bubble burst in 2000. They mostly target people who aren’t wealthy enough to invest in hedge funds, the lightly regulated private partnerships that are typically open only to clients with a net worth of at least $1 million.
  • Like other mutual funds, alternative funds are overseen by the U.S. Securities and Exchange Commission and operate with restrictions on the investments they can hold.  They also face limits on a tool employed freely by hedge funds: borrowed money, which can be used to amplify returns.  (this is the main investment difference betwen mutual funds and hedge funds - leverage is an absolute no go for mutual funds)
  • “Mutual funds are heavily regulated and hence often respond to market shifts more like an oil tanker and less like a kayak,” he said.
  • A majority of institutions and financial advisers said alternatives will account for more than 10 percent of their portfolios over the next five years, according to a Nov. 16 survey by Morningstar and Barron’s magazine. A quarter of those polled expect to have more than 25 percent of their investments in that category. (works for me)  “A lot of people don’t want to have another situation like they did in 2008 where they can lose 40 or 50 percent again,”
  • Alternative-investment products currently account for less than 1 percent of the $10.8 trillion mutual-fund industry.  (that will change... bit time.  I've said that for 2+ years - the dream era of 1983 to 1999, completely fooled people into thinking that was normal)
  • The S&P’s rebound this year may limit the growth of alternatives in the near term, says Burton Greenwald, an independent mutual-fund consultant in Philadelphia.  “As the public returns to the equity markets, they will be less interested in these somewhat exotic products,” Greenwald said. “Given a year or two of traditional stock-market returns, their memories might prove to be very short.”  (I agree, people have very short memories....until the next crisis.  Who wants to be hedged when the market only goes up month after month after all!)
  • “Mutual funds are losing assets, and it might be that they are looking to salvage some of the market share they are losing to hedge funds,” Peter Rup, chief investment officer at New York-based Orion Capital Management LLC, which invests in hedge funds, said in an interview. “The long-only strategy is antiquated,” he said.

That last comment is quite interesting... an antiquated model has 99% of market share in the place the peasants put their money.  But once you enter the nobility, the investment strategies expand exponentially.  Says a lot if you really think about... and once again it should highlight to you why CNBC has a parade of managers who face the retail client who only know one thing send me your money, dollar cost average, if you lose 40% with me... that is ok... the market only goes up over the long term.  p.s. did I mention send me more of your money after I killed you in my fund last year? (of course you end your interview with a smile and the CNBC host giggles in agreement)