Long-Short Fund a Good Choice for Today's High-Risk Market

In today's high-risk, extremely volatile market environment where fortunes accumulated over a lifetime can disappear overnight, the ability to accurately forecast short-term market swings is an asset worth its weight in gold. In this emotional market climate, embracing one investment posture over another for any length of time can prove fatal. The order of the day is versatility—being able to switch from long to short and from short to long at a moment's notice.

Among the countless multitude of mutual fund managers who promise to safeguard capital and turn over a profit, not more than one in 1,000 can profit in anything other than a runaway bull market. Only a tiny handful are dedicated to making money in bear markets (most notably the Prudent Bear Fund). Others afford the investor the ability to switch from bull to bear with nothing more than a simple phone call (viz., the Rydex Trust Series, ProFund and Potomac mutual fund families). But of all these funds (respectable in their own right) none of them are internally managed and controlled by a fund manager or team of investors. The ultimate choice of whether to allocate funds to the long side or the short side of the market remains the sole burden of the individual fund shareholder.

On the institutional level, hedge funds that aim at profiting in up and down markets exist but are normally out of reach for the average investor. Now, however, a single alternative to self-managed all-weather mutual funds is available for the individual investor. The Choice Long-Short Fund, to our knowledge, is the only internally managed mutual fund in the country that endeavors to profit in both bull and bear markets. Its investment primary strategy involves active management of the market's current technical and fundamental position in order to derive signals for going short or going long securities at the appropriate time, rather than embracing a single investment posture in all market climates. In this respect, the Long-Short Fund is head and shoulders above its peers and shows the greatest prospect for success in this current transition market.

The fund is managed by Patrick Adams, CFA, who has many years of experience managing money on the institutional level. The firm that he heads up, Choice Investment Management, is headquartered in Milwaukee, Wis., far away from the treacherous influence of Wall Street. We were initially drawn to Adams by one of his recent statements concerning the management of the Long-Short Fund: "We talk to Wall Street in great detail, but we don't rely on Wall Street to do our research. I've found that any time in the past that I've relied on Wall Street to do our research. I've found that any time in the past that I've relied on Wall Street it's been a big mistake, but we use Wall Street to help gather information and make very independent decisions on buying and selling stocks."

The hedging fund, the third mutual fund introduced by the company since it began doing business in November 1999, was designed for today's market volatility. The Long-Short Fund, which has attracted $40 million since its inception in February, requires a minimum initial investment of $10,000 as part of its strategy to attract the right kind of investors. Through the fund's asset allocation, volatility is reduced and performance is enhanced through a hedged exposure of between 10% and 20%.

The theme behind the Long-Short Fund is, in Adam's words, "to provide investors an absolute return [but one] that is not relative. It's not relative to the S&P 500 or to the Nasdaq, but we're shooting for absolute returns. It's a unique asset class. It'll be a sector of the mutual fund market that's going to grow very quickly, we believe, over the next ten years."

Unlike a market-neutral strategy that balances long and short positions within the same sector to reduce risks, the directional style being applied by the Long-Short Fund will invest across many different sectors, with between 20 and 30 stocks on the long side and 30 to 35 on the short side. Adams says he anticipates the fund's short positions being somewhere around 25%-50% of the fund over time, while the fund's net exposure will be somewhere between 10% on the short side to anywhere around 70%-75% on the long side. As part of the fund's risk management strategy, losses on short sales will be limited to 10%, while losses on longs will be limited to 20%. The fund seeks a targeted return of 20% on an annual basis.

Says Adams, "In my opinion, five to ten years, will be much more volatile than it's been over the past 20 years because you don't have that P/E kicker to support the market, therefore the market's more dependant upon earnings growth and therefore managers need additional tools to manage that volatility or investors are just going to have to get used to more volatility in the portfolio. Now the Long-Short Fund gives us the tools that we need to make money regardless of market conditions. So if the market's going up or if the market's going down, we feel pretty comfortable that we have the potential to make money in either environment."

Investors seeking more information on the Choice Long-Short Fund should visit the company's web site at www.choicefunds.net