Benefits of Hybrid Mutual Funds

Abstract

Hybrid mutual funds offer some unique benefits relative to both traditional mutual funds as well as traditional hedge funds. Compared to traditional mutual funds, hybrid mutual funds offer unique return and risk opportunities which in many ways (leveraging, short-selling) are similar to many hedge fund strategies. Despite the similarities, the hybrid mutual funds also differ from hedge funds. Regulations restrict a mutual fund's ability to leverage or borrow against the value of securities in its portfolio. The effect of these constraints has been to limit leveraging by mutual fund portfolio managers to one-third the value of their assets and to limit short sales to only as high as 50% of assets. Thus, hybrid mutual funds are restricted in several ways from mimicking many of the hedge fund strategies. However, in contrast to these investment limitations relative to hedge funds, hybrid mutual funds offer daily liquidity, lower cost structure, and regulatory and custodial protections similar to traditional mutual funds.

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