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Making Sense Of Cash And Shorts

Posted: Sep 29, 2008 08:22 AM by Gregory S. Davis

Tickers in this Article: GLD, TTES, SLH, BRKR, PFE, VZ, IBM

Knowing when to move assets into cash can be the mark of an expert fund manager. For individual investors a healthy dose of fear is reason enough to cash out of equity positions altogether. The following are a group of mutual funds that have large cash positions either from short selling or from an asset allocation decision. Investors thinking of taking some cash out of equities, but still interested in equity exposure hedged against short or cash positions should consider the following. (To learn more about the different types of mutual funds available, read Mutual Fund Categories.)

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Vanguards Long and Short
The Vanguard Market Neutral Investor Fund (VMNFX) was given the highest ranking on the Lipper Leader Scorecard for total return, consistent returns and asset preservation. VMNFX seeks long-term appreciation from large-cap and mid-cap stocks and hedges against stock market risk by short selling individual stocks. The short selling inflates the amount of cash the fund has on hand since the cash is needed to cover the short positions. Year to date the fund has returned -4.42% while the fund's three-year return is 5.88%. The biggest downside of this fund is the $250,000 minimum investors need to begin investing in the fund directly. Top holding include IBM (NYSE:IBM), Verizon (NYSE:VZ) and Pfizer (NYSE:PFE).

Lipper Market Neutral Leader
The TFS Market Neutral Fund (TFSMX) is another market neutral fund that was given the same high rankings on the Lipper Leader Scorecard as the VMNFX fund with and additional 5-out-of-5 score for tax efficiency. Lipper’s rating agency has named TFSMX as the best market neutral fund as of the end of August 2008. In a similar fashion to the VMNFX fund TFSMX's strategy also employs short selling to lower its correlation to the overall market. The fund has returned -5.73% since the beginning of the year and 10.23% over the past three years. Top holdings include bioscience company Bruker Corporation (Nasdaq:BRKR), automotive claims solutions provider Solera Holdings (NYSE:SLH) and oil & gas services provider T-3 Energy Services (Nasdaq:TTES). Each of the funds top holdings listed has outperformed the S&P 500 year to date.

Go Anywhere Fund
The IVY Asset Strategy Fund (WASAX) is a flexible allocation fund that has earned Lipper Leader Scorecard top ratings for total return, consistent return and tax efficiency. The great thing about WASAX is its ability to invest in a variety of instruments including commodities, equities and currencies. WASAX has approximately 51.73% of its portfolio in cash followed by nearly 40% allocation for stocks. The fund is currently concentrated in the oil & gas, industrials and consumer goods sectors. Although WASAX is down -15.36% year to date the fund is up 14.81% over the past three years. The funds top long positions are SPDR Gold Shares (AMEX:GLD), Brazilian Petroleum (NYSE:PBR) and Monsanto (NYSE:MON).

Final Thoughts
Figuring out what to do with cash is a dilemma many investors face. While some money managers keep cash on hand to cover short positions others sometimes choose to keep assets in cash until the path forward becomes clearer. Ultimately the choice is yours to make.

To learn more about short selling, read our Short Selling Tutorial.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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