By Tim Dulaney, PhD, FRM and Tim Husson, PhD
We see it again and again: complex investment strategies packaged into traditionally conservative investments. We have seen corporate debt linked to exotic derivatives positions (structured products), exchange-traded products linked to complex futures positions (commodities and volatility ETPs), variable annuities linked to options strategies (structured product based variable annuities), and even certificates of deposit with complex payoff structures (structured CDs). Now, we are seeing more and more mutual funds that use investment strategies typically only seen only in hedge funds. The difference, of course, is that while hedge funds can only be sold to accredited investors, shares of mutual funds can be sold to anybody.
InvestmentNews' Jason Kephart is reporting that Fidelity is planning to launch the Fidelity Event Driven Opportunities Fund, currently awaiting SEC approval. The fund will follow an 'event-driven' strategy, attempting to profit from corporate actions which could affect a company's stock price. According to the article, it will not take short positions.
Event-driven strategies are based on the idea that a company's stock price might become mispriced during a restructuring, merger, or other major corporate event. Event-driven traders will buy stocks they consider temporarily underpriced, and sell when that price 'corrects' itself. There already exists an event-driven mutual fund, The Arbitrage Event-Driven Fund (AEDNX), and several indexes.
FINRA has issued an Investor Alert on 'alternative' mutual funds, warning that investors "should be aware of their unique characteristics and risks." Also, FINRA notes that management, transaction, and other fees can be higher with more complex trading strategies than traditional buy-and-hold investments. While Fidelity is not alone in offering alternative mutual funds, it is interesting that a brand closely associated with fundamental investing would adopt this new approach.
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