Schwab Unveils Quasi Hedge Fund Fund

August 8, 2002 ( - Charles Schwab Corp is rolling out a new hedge fund-like mutual fund that may give stock market shocked investors an alternative investment.

Schwab said its Schwab Hedged Equity Fund has the additional benefit of being safer than more loosely regulated hedge funds, while delivering similar returns by using techniques that are forbidden at most mutual funds.

The fund, to be launched September 3, will be managed by two stock pickers, who will buy shares they hope will rise and sell short shares they expect will fall. Investors can buy into the fund for an initial investment of $25,000, Schwab said in a statement.

So-called short selling, where managers borrow stocks they bet will fall only to repay loans at lower prices later, has been one way the $550 billion hedge fund industry has outpaced the $7 trillion mutual fund industry for more than two years, according to Reuters.

But hedge funds have largely been too rich for average mutual fund investors because they require large minimum investments, as well as proof that investors are sophisticated – or at least wealthy.

Hedge funds also charge far higher fees made up of a management fee that is also charged by mutual funds as well as a performance levy that is not charged by most mutual funds.

This year has been particularly brutal for mutual fund investors with the average US diversified stock mutual fund slumping over 19% since January.

CBSMarketWatch notes that while this is Schwab’s first stab at a long-short fund, there are already a number of such funds available.  Mutual fund analyst Lipper tracks 21 market-neutral funds, including all asset classes, which have returned 7% as a group since the beginning of the year through Tuesday, according to the report.  However, most of the funds are fairly young and only three have five years or more under their belt:

  • Caldwell & Orkin Market Opportunity:  ticker COAGX
  • Lindner Market Neutral:  ticker LDNBX
  • Calamos Market Neutral:  ticker CVSIX

Meanwhile the average hedge fund is off only 1.49% in the first six months of the year, according to data from hedge fund consultants The Hennessee Group.