Rydex Launches Two Hedge-Like Products

Mar 17 2006 | 12:00am ET

Rydex Investments, which last year launched a series of hedge-like mutual funds, unveiled two more products this week that employ hedge fund strategies. The offerings were created for investors aiming to diversify their portfolios and gain absolute returns, according to Mike Dellapa, director of investment research for the firm.

One offering, the Rydex Absolute Return Strategy, is geared toward matching the performance of a hedge fund composite index, while the other, the Rydex Hedged Equity Fund, is geared toward matching long/short hedge fund indices. The firm is offering each strategy as both an annuity fund and a mutual fund.

The Absolute Return Strategy will invest only in domestic equities, while the Hedged Equity Fund also has exposure to commodities, credit defaults, merger arbitrage and currencies. The primary target investors are financial intermediaries, who then sell to retail investors.

“A lot of our products take what is considered an institutional strategy and package it for a retail investor,” said Dellapa.

However, he thinks that institutions would be interested in the new funds, though they are not likely to invest in them in their current form. He added that the firm is able to create similar, separately managed accounts if an institutional investor requests it, and, in fact, Rydex is in discussions with one right now to do just that.

Compared to a regular mutual fund, “the biggest advantage is broader diversification,” Dellapa said. “And versus a hedge fund, certainly cost is going to be a big benefit. Fund-of-funds are probably the most comparable to what we are doing and we don’t have the layer of fees for the fund-of-funds or the underlying managers.”

Another way Dellapa said the new funds are different from fund-of-funds is that they net out multiple positions. “Fund-of-funds may invest with multiple managers who have offsetting positions, but because we are investing with a top-down approach and determining what those net exposures are, we’ll net out those positions,” he said.

The new funds join a slew of hedged mutual funds that have hit the market over the past year. Janus Capital Group and American Century Investments both have mutual funds that mimic hedge funds, while Allianz Global Investors and Julius Baer Holdings are both seeking permission from their shareholders to alter their mutual fund investment styles to allow for hedging strategies.

Meanwhile, some firms such as Oppenheimer Funds and Principal Global Investors already use hedge-like techniques in their funds, including derivatives trading, short selling and leveraging. Dellapa said the new offerings from Rydex are a bit different to what is already available.

“The mutual fund products that are out there that are trying to do this are typically run more like a hedge fund than we are, so they will look at a single strategy and then they’ll go long or short that one component only,” said Dellapa. “We are trying to understand the source of the industry’s returns—such as where the risks are focused for the whole industry—and provide access to that, instead of running it in isolation.”  


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