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Making money now
Exotic hedge fund strategies may be out of reach but there are steps average investors can take.
August 24, 2005: 5:47 PM EDT
by Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - Stocks are stagnant, bonds are blah, and mutual funds are mediocre. What's an investor to do?

Recently, we outlined some non-traditional strategies that hedge funds are using to make money. But mom and pop investors -- who don't have billions in cash at their disposal -- can't employ these techniques, which are best left to the pros anyway. Retail investors are seemingly forced to tread water in a lackluster environment.

But don't despair. Experts say mom and pop have options. And while radically altering your portfolio is probably not a good idea, there are a handful of funds and strategies offering a twist on traditional stock and bond funds.

Of course, financial planners warn against chasing after "hot" money, as buying into strategies at the peak of their popularity is one of the most common mistakes investors make. If used judiciously, however, these funds can add a little oomph to ordinary portfolios.

Mutual Funds

Investors looking to get some extra returns from mutual funds may want to add non-traditional funds to their portfolios. Two popular non-traditional funds are tied to the commodities market.

Both Pimco and Oppenheimer offer such funds, which invest in a basket of commodity futures. They are designed not to be correlated to the broader market --which can be a good thing when the markets aren't doing well. But commodities can also be much more volatile than stocks or bonds, meaning the potential for losses is greater.

"That's a real concern," said Benjamin Poor, an analyst with Boston-based research firm Cerulli Associates. But he thinks these funds are a step above traditional sector funds that limit investors to stocks in one individual industry. "These funds often use futures, which is a very liquid market. It's not like you are making a pure energy play -- you also own foodstuffs and other types of commodities and may behave very differently."

Oppenheimer's Real Asset Fund is meant to act as a hedge against inflation. So far, it has netted a 16.16 percent return this year. Michael Terry, a certified financial planner for Financial Asset Management, is partial to Pimco's Commodity RealReturn Strategy fund, which has generated a 12.29 percent return this year.

A spokeswoman for Oppenheimer said the firm suggests investors use it as a small part of an overall portfolio. Oppenheimer recommends that investors allocate no more than 10 percent of their total portfolios to the fund.

For more conservative investors seeking steady income, there are dividend income funds. One such product is the Alpine Dynamic Dividend fund, launched in September 2003 to take advantage of Bush's changes to the dividend tax law, which lowered the taxes investors pay on dividends from stocks.

Portfolio manager Jill Evans said the fund, which has about 100 stocks in its portfolio, has earned a 23.61 percent return since inception through June 30.

Some planners say they would just as soon seek out dividend-paying stocks for clients, to get the yield without paying mutual fund fees.

Todd Campbell, president of E.B. Capital Markets, an independent research firm catering to institutional clients, said the benefit of investing in a dividend income mutual fund is that someone is continually watching these stocks, and they are more diversified.

Fixed Income

Investors looking for yield are having a tough time, and experts say it is not likely to get any easier in the coming months.

"There are not a lot of screaming opportunities out there," said Scott Berry, a senior fund analyst at mutual fund tracker Morningstar.

One way to play the bond market, Berry said, is to get into a diversified fixed-income mutual fund that can dip into riskier products like junk bonds or international bonds that would be hard for individual investors to find and evaluate.

Financial Asset Management's Terry said he is telling his clients to look outside bonds for yields.

"Interest rates are continuing to go up, and yields are kind of low, so for those clients who are looking for good yields, we have been using some preferred stocks," he said.


Exchange-traded funds, which combine the diversification and cost benefits of index funds with the liquidity and tax efficiency of individual stocks, are extremely popular right now, as evidenced by the number of hedge funds buying them. But they're appealing to individual investors as well.

"I like them; I think they offer a tremendous opportunity for investors because it gives you opportunity to act intraday not that you should be day trading but if something happens in your life you don't have to wait like a mutual fund," said Campbell at E.B. Capital Markets.

In terms of sector ETFs, Campbell said he likes the oil services industry, and sees the healthcare industry as attractive because the aging population creates opportunity for these stocks. More risk-tolerant investors can try ETFs tied to technology, but he advises against investing in ETFs tied to banks for the time being.

Real estate

The pros agree: Now is not the time to buy a REIT fund. REITs, or "real estate investment trusts," are companies that own and operate properties, including apartment buildings, office buildings, hotels and shopping centers. They also receive special tax considerations and pay out high dividends.

"We made a lot of money in REITs from 2001 to 2003, but sometimes you've got to take your profits off the table," said Terry, of Financial Asset Management.

Said E.B.'s Campbell: "This is not the time to bet your house on REITs. They are at the high end of historical price-to-earnings ratios. If you're not already at the dance it's too late to show up."

Jordan Irving, vice president and senior portfolio manager of the Delaware Dividend Income Fund, agreed that REITs aren't the place to be but argued that owning them is not akin to owning Internet stocks in late 2000.

"They continue to have tremendous free cash flow characteristic as well as hard assets," he said. "It's something that's a little bit different because there is underlying value."

Also, speculative real estate buying has been getting a lot of media attention but most experts say you shouldn't try this type of speculation at home (pun intended).

This is not to say you shouldn't consider investing in real estate -- just don't think it's a guaranteed way of making a quick buck.

"If you're going on, odds are you're in for some trouble," said Delaware Dividend's Irving.


Check out the ETF Center, the Real Estate Zone, or Money 101.  Top of page

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