Cross fund investing refers to investing across different types of funds, such as hedge funds, mutual funds, private equity funds, etc. This strategy allows investors to diversify their portfolio and tap into unique return opportunities. Some key cross fund investing strategies include:
1. Combining active and passive funds: Investors can blend active mutual funds that try to outperform the market with passive index funds that track market performance. This balances the potential for excess returns with cost efficiency.
2. Mixing alternative funds: Incorporating alternative investments like hedge funds, private equity and venture capital into a portfolio alongside traditional assets can enhance diversification. These funds have a low correlation to traditional assets.
3. Tapping global opportunities: Investing in international mutual funds and global hedge funds allows investors to gain exposure to foreign markets and asset classes. This helps mitigate geographic investment risk.
4. Using multi-strategy hedge funds: Funds that utilize multiple hedge fund strategies – like long/short equity, distressed debt and merger arbitrage – can help smooth returns over time through diversification.
The key to successfully executing cross fund investment strategies is appropriately balancing risks, returns and costs with alignment to an investor’s goals. This necessitates thorough research and advice from investment professionals.
Combining active and passive fund investing provides a balanced approach
One effective cross fund investing strategy is to hold a mix of active and passive funds in a portfolio. Actively managed mutual funds attempt to generate returns greater than their benchmarks through security selection and trading strategies. However, they tend to have higher fees and face challenges consistently outperforming indexes. Passively managed index funds and ETFs simply track market indexes, providing low-cost market returns with no stock picking.
By utilizing both active and passive fund investing vehicles, investors can balance the upside potential of active management with the cost efficiency of passive vehicles. This blended approach allows investors to capture some excess returns while controlling overall costs. For example, a portfolio might allocate 60% to low-cost, diversified equity index funds and 40% to actively managed sector, country or thematic equity funds. The active funds can focus on niche areas perceived to provide alpha opportunities, while the passive funds efficiently cover core exposures.
Incorporating alternative investment strategies enhances diversification
While most portfolios focus heavily on traditional stock and bond funds, adding exposure to alternative strategies like hedge funds, private equity and venture capital can provide diversification benefits. These assets have a low correlation to traditional markets, helping mitigate risk during periods of elevated market volatility when stock and bond prices fall in tandem.
Hedge funds aim to generate consistent returns in all market environments using dynamic strategies like short selling and derivatives trading. Private equity and venture capital funds invest in private companies and startups with the potential for high growth. The illiquid nature of the private investments allows fund managers to capture an illiquidity premium. With wider security selection universes and return streams less tied to public equity and debt markets, alternative strategy funds can enhance portfolio diversification.
Global fund investing expands the opportunity set
Most U.S. investors concentrate the majority of their assets in domestic market funds. However, incorporating dedicated exposure to international and global mutual funds and hedge funds allows investors to tap into returns from growing overseas economies. It also helps mitigate country-specific investment risks.
International stock funds provide a straight forward way to gain equity exposure beyond the U.S. Global asset allocation funds hold a mixture of U.S. and non-U.S. securities across stocks, bonds and cash to balance return potential with volatility. Regional funds zero in on specific parts of the world perceived to offer strong growth.
For those comfortable with more complexity, global macro hedge funds analyse worldwide market trends to inform dynamic trading across currencies, sovereign debt, stocks and commodities. Global macro strategies allow experienced investors to efficiently capitalize on emerging country and asset specific opportunities.
Cross fund investing strategies involve allocating across different fund types to enhance diversification and return potential. Combining active and passive funds offers a cost-efficient balanced approach. Incorporating alternative strategies improves portfolio diversification. Investing in global fund strategies mitigates geographic investment risk while opening up new return opportunities.