Opinion polls ahead of the U.K. vote on whether to leave the European Union (EU) have clearly failed to give a direction, eventually keeping traders on the edge. While stock markets had fallen sharply last week as polls tilted toward an exit vote, new polls this week showed growing support for the "stay" camp. Both Soros and Yellen warned that a U.K. exit from the EU will pose significant risk. And on top of it, the Fed's reluctance to hike rates raised concerns about the strength of the economy. This was corroborated by the central bank downgrading the economic outlook for the rest of the year.
Amid such anxious moments, long/short mutual funds are the best available choices. Their potential to hedge risk, provide unwavering returns and diversify the portfolio helps them to stand out from other mutual fund classes, particularly during difficult times.
Opinion Polls Signal Mixed Results
Investors are increasingly edgy over the referendum, which is slated tomorrow, on whether U.K. should stay in the EU. The possibility of a Brexit had intensified last week, which raised concerns about the U.K. sinking into a recession and the markets falling prey to fresh bouts of volatility. Brexit concerns weighed on stocks in recent trading sessions, dragging the Dow down 1.1% last week, the index's biggest weekly decline in more than a month.
However, investor sentiment improved somewhat this week when the polls veered toward a "remain." An ORB poll for the Telegraph showed that the "remain" camp maintains a lead over the "leave." But, a Survation poll showed that the referendum remains highly contested with both camps polling within one percentage point of each other. Many believe that the death of the British politician Jo Cox, an active pro-EU campaigner, is responsible for swinging the vote in favor of "Bremain."
Adverse Effects of a Brexit
Amid all the uncertainty, one thing is for sure that if a Brexit does happen, then the quality of trade that Britain has with the rest of the world and its centuries-old tradition of entrepreneurship will all stand to lose. This will eventually trigger market turbulence. Access to a single market has helped British firms export and expand their business.
An exit will push Britain's economy into a recession, resulting in a drop of 3.6% in GDP and around 500,000 job cuts. U.K. may lose other essential benefits including free movement of goods, services, capital and people. British Prime Minister David Cameron had forewarned that Brexit will dry up around 40 billion pounds in U.K. public finances by 2020.
Soros, Yellen Strike a Cautious Tone
George Soros has in very clear terms warned about the impact of a Brexit. He said that a substantial decline in the value of the pound, falling household income and ultimately a recession may be the possible consequences of a Brexit. Soros also quoted figures from the IMF to bolster his views. According to the IMF, households would stand to lose between $4,400 and $7,335 on an annual basis. This would largely be due to a plummeting pound. Soros predicted that the pound will fall by 15% to 20%.
Fed Chair Janet Yellen too added that global developments including Brexit needs to be monitored. She said that Britain's possible exit from the EU would have "consequences for economic and financial conditions in global financial markets."
How to Play This Uncertainty?
As the Brexit debate reaches a climax, the markets are seized by fresh bouts of volatility. Barring U.K.'s looming vote, it is the Fed's reticence to raise interest rates that is also making investors jittery. The Fed's dovish approach raised doubts about the strength of the economy, and this was compounded by the central bank downgrading its economic outlook for the rest of the year.
With a lot of uncertainty ahead, it will be prudent to invest in long/short mutual funds, which will not only minimize risk, but also provide stable returns. These types of funds are available to investors of all income levels and provide that extra edge of diversity. A long/short fund seeks to gain from both winning and losing stocks, irrespective of the current market scenario.
Buy 4 Long/Short Mutual Funds
Here we have selected four such long/short mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns, carry a low expense ratio and has minimum initial investment within $5,000.
Glenmede Long/Short Portfolio (MUTF:GTAPX) invests the majority of its net assets in long and short positions with respect to equity securities, such as common stocks of U.S. public companies. GTAPX's three-year and five-year annualized returns are 4.1% and 5.1%, respectively. Annual expense ratio of 1.16% is lower than the category average of 1.9%. GTAPX has a Zacks Mutual Fund Rank #1.
FundX Tactical Upgrader Fund No Load (MUTF:TACTX) seeks long-term capital appreciation with less volatility than the broad equity market. TACTX's three-year and five-year annualized returns are 2.7% and 3.5%, respectively. Annual expense ratio of 1.24% is lower than the category average of 1.9%. TACTX has a Zacks Mutual Fund Rank #2.
Aberdeen Equity Long-Short Fund A (MUTF:MLSAX) invests a major portion of its net assets in long and short positions in equity securities of publicly traded companies in the U.S. MLSAX's three-year and five-year annualized returns are 1.9% and 2.6%, respectively. Annual expense ratio of 1.56% is lower than the category average of 1.9%. MLSAX has a Zacks Mutual Fund Rank #2.
Schwab Hedged Equity Fund (MUTF:SWHEX) seeks long-term capital appreciation over market cycles with lower volatility than the broad equity market. SWHEX's three-year and five-year annualized returns are 6.3% and 6.2%, respectively. Annual expense ratio of 1.33% is lower than the category average of 1.9%. SWHEX has a Zacks Mutual Fund Rank #1.