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DECEMBER 12, 2005
Funds Made To Deliver "Absolute return" mutual funds aim for a positive result no matter how the stock market does One of the drawbacks of investing in mutual funds is that you can have relatively good returns but absolutely awful results. That's because most funds measure success -- and the manager's bonus -- on whether they beat a benchmark like the Standard & Poor's 500-stock index or a composite of competitor funds, not whether its shareholders actually make any money. In 2002, when the S&P 500 lost 22% of its value, a fund losing just 10% would have been a winner. Now a new breed of mutual fund is emerging known as the "absolute return" fund. Using techniques more akin to hedge funds, these funds try to make a positive return no matter what's happening in the stock market. Such funds as Alpha Hedged Strategies Fund (ALPHX ) and Rydex Absolute Return Strategies Fund (RYMSX ) invest in areas where most mutual funds don't -- among them currencies, commodities, distressed debt, convertible-bond arbitrage, and merger arbitrage. There are too few absolute-return funds with track records long enough to say whether these investments succeed. The oldest of them, Alpha Hedged Strategies, opened in October, 2002, has a 7% average annual return over the last three years. Manager Lee Schultheis uses hedge fund consultant Trust Advisors to vet the managers, and he determines how much money to allocate, based on their investment styles. Although investors are not paying hedge fund-like fees -- 1% to 2% of assets a year plus 20% of the profits -- this mutual fund is costly. The expense ratio is 3.99% vs. an average 1.48% for equity funds. The second oldest fund, Agile Multi Strategy, has an even higher expense burden, 4.12% -- and a losing record, down 5% since its January, 2004, launch. DIVERSE APPROACHES Rydex Absolute Return Strategies, barely two months old, takes a very different approach. Manager Jeff Joseph turns to computer-driven models to study some 3,000 hedge funds which fall into 13 broad categories. He then designs his portfolio to mimic the kinds of funds that are performing best and rebalances his portfolio monthly. No one strategy can exceed 55% of his portfolio. The downside of Rydex Investments' approach is that the firm has little experience implementing it. Joseph says that doesn't matter; numerous studies indicate that the lion's share of hedge fund returns are derived not from managerial skill but from employing identifiable and imitable strategies. The Rydex approach is certainly more economical: The expense ratio is just 1.40%. Somewhere between these two approaches is the UBS Dynamic Alpha Fund -- a $1.7 billion fund. The fund has a 1.32% expense ratio, and it also has a deep and experienced management team led by Brian Singer and access to more than 100 stock and 20 bond analysts at UBS Global Asset Management (UBS ). The fund doesn't use all the strategies open to the other two, but it has the ability to buy or sell short almost any stock, bond, or currency throughout the world. That may present some intriguing opportunities in the bond sector, where the fund currently has a short position in Japanese bonds. Given that Japanese interest rates are close to zero, any rise in rates from an improving economy will cause bonds to fall and net gains for this fund. Another middle-of-the-road fund is Absolute Strategies Fund. Like Alpha Hedged Strategies, this fund parcels out money to other advisers. But not all goes to hedge fund managers. About a third of the fund's portfolio is invested with mutual fund companies such as Loomis, Sayles & Co. and Yacktman Asset Management that rarely, if ever, hedge. Given how new these funds are, it may be best to watch and wait to see if they can absolutely deliver.
 By Lewis Braham
BW MALL
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