HYBRID MUTUAL FUND STYLES - Explained

Equity Market Neutral This investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well-designed portfolios typically control for industry, sector, market capitalization, and other exposures.

Long/Short Equity and Hedged Equity This directional strategy involves equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. In the Hybrid Strategy, we separate this category into long-short and “hedged equity.” The difference is the degree to which they short. A long-short fund typically shorts more than a hedged equity fund.

Dedicated Short The strategy is to maintain net short as opposed to pure short exposure. Short bias managers take short positions in mostly equities and derivatives.

Bond Hedge Funds that short bonds. That is, as interest rates rise, bond prices fall and these funds appreciate in value.

High Yield Bonds Often called junk bonds, this subset refers to investing in low-graded fixed-income securities of companies that show significant upside potential. Managers generally buy and hold high yield debt.

Distressed Debt Fund managers invest in the debt, equity or trade claims of companies in financial distress and generally bankruptcy. The securities of companies in need of legal action or restructuring to revive financial stability typically trade at substantial discounts to par value and thereby attract investments when managers perceive a turn-around will materialize.

Convertibles Funds that invest in bonds and preferred stock issues that are convertible into the stock of the same issuer if the stock reaches certain price level.

The convertible therefore has stock and bond features. It is expected to increase in price as the issuer’s stock rises, while the bond structure of the convertible may limit its losses when the stock’s price falls.

REITs Funds that invest in publically-traded Real Estate Investment Trusts, which are real estate companies that trade on the stock exchanges.

Merger Arbitrage Specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. The principal risk is deal risk, should the deal fail to close.

Asset Allocation In these funds (which are also referred to as “global macro” styles), managers carry long and short positions in any of the world's major capital or derivative markets. These positions reflect their views on overall market direction as influence by major economic trends and/or events. The portfolios of these funds can include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments.

Commodities Funds that use derivatives or stocks to gain exposure to the performance of a basket of commodities such as energy, metals and grains.