Recent tensions in global markets have made investors jittery. This concerns the terror attack in London ahead of the U.K. general election. Moreover, former Federal Bureau of Investigation (FBI) Director James Comey is scheduled to deliver a public testimony soon, which along with a European Central Bank meeting this week has also added to market uncertainties.
Against this backdrop, alternative mutual funds seem to be the best way out for investors. These are distinguishable by the potential to hedge risks, provide unwavering returns particularly in difficult times and a diversified portfolio.
Uncertainties Ahead of U.K. Election
During the weekend, a tragic terror attack struck London Bridge with a van crashing into foot traffic and then knife-wielding attackers stabbing passers-by. The attack claimed seven lives and left dozens wounded, including 21 critically injured. It is the third attack in less than three months in the U.K. and has put a question mark over the present government's competency to prevent such attacks.
Additionally, the Conservative party, helmed by Prime Minister Theresa May, is trying to stay in control as it tries to execute its Brexit strategy. Any upset for the Conservative party in the general election could result in more uncertainty over Brexit.
Also, investors are looking forward to the ECB's meeting in Estonia on June 8. In the event that the ECB decides to change its stance on monetary policy, the eurozone and global markets at large would have to bear the brunt of unexpected tightening.
Additionally, a bout of tension is growing in the Middle East as Saudi Arabia and other major Arab states cut their diplomatic ties with Qatar after the nation has been accused of backing terrorism. Any tension between OPEC members like Qatar and Saudi Arabia is expected to have a negative impact on any possible future OPEC deal.
Ex-FBI Chief Comey's Testimonial in Focus
Moreover, ex-FBI Chief James Comey will testify before the U.S. Senate Intelligence Committee on Thursday. Comey will first give a public testimonial, followed by a private one, regarding the recent investigation over Russia's involvement in the U.S. election last November.
Former FBI Chief's Thursday testimonial is expected to have a major impact on investor sentiment, because the sudden firing of Comey raised questions among investors about Trump's ability to implement his pro-growth policies. Further, weak jobs data and disappointing services sector performance also added to investors' woes in the U.S.
How to Play This Uncertainty?
Investing in alternative mutual funds is the best way to play this uncertainty. These funds mostly include long/short equity funds, market-neutral funds and trading-leveraged equity funds. Such types of funds are available to investors of all income levels. Let us now discuss these 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 current 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 undervalued stocks. Weights are subject to change and are dependent on management's view of the market.
Market-Neutral Mutual Funds
Market-neutral funds aim to adopt a precision approach by shorting 50% of their assets and holding 50% long. This approach seeks to identify pairs of assets whose price movements are related. The fund goes long on the outperforming asset and shorts the underperformer.
Leveraged Mutual Funds
Leveraged funds not only help you in making money by utilizing other people's money but also offer benefits such as diversification. These funds help investors, especially with small investments, to invest in a diversified portfolio of assets in the capital markets. Diversification minimizes risk, while escalates returns.
3 Top Alternative Mutual Funds for Your Portfolio
As mentioned above, alternative mutual funds are new product classes that are equipped to protect investors' portfolio and provide steady returns amid market volatility. Thus, we have selected one mutual fund from each of the three key types of alternative funds, long/short, market-neutral and leveraged-equity. All the three alternative mutual funds boast a Zacks Mutual Fund Rank #1 (Strong Buy), have positive 1-year annualized return, minimum initial investments within $15000 and carry a low expense ratio.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Schwab Hedged Equity (MUTF:SWHEX) seeks long-term capital appreciation and lower market volatility by investing heavily in domestic companies. The fund establishes long and short positions in securities issued by the companies of different market size. SWHEX's one-year annualized return is 12.9%. Annual expense ratio of 1.33% is lower than the category average of 1.96%.
Calamos Market Neutral Income A (MUTF:CVSIX) invests mainly in convertible securities and employs short selling to enhance income and hedge against market risk. CVSIX's one-year annualized return is 5.6%. Annual expense ratio of 1.08% is lower than the category average of 1.46%.
ProFunds Internet UltraSector Fund (MUTF:INPIX) seeks daily investment results before fees and expenses that correspond to one and one-half times the daily performance of the Dow Jones Internet CompositeSM Index. INPIX's one-year annualized return is 48.6%. Annual expense ratio of 1.50% is lower than the category average of 2.02%.