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Fund Spy: Morningstar Medalist Edition

Know Your Options

Long-short funds that employ options-based strategies can lead to a wide range of outcomes.

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Over the past couple of years, a slew of new mutual funds employing options-based equity strategies have entered the marketplace, and they often end up in the long-short equity Morningstar Category. These funds claim to offer some attractive features, including an additional stream of "income" wrung from the writing of put or call options, as well as the potential to hedge against stock market downturns. Though it is true that investors can benefit from these characteristics, it's also true that options strategies come in a staggeringly complex range of combinations and correspondingly diverse outcomes. One should never assume that just because a fund touts its options prowess that the strategy will provide sure protection in a downturn; the devil is always in the details with these funds.

To illustrate the potential differences, I'll take a look at how three options-based funds, all of them Morningstar Medalists, performed during one of the steepest parts of the August 2015 U.S. market downturn. The three funds are Silver-rated  Gateway (GATEX), which uses a collar strategy and is one of the longest-running long-short funds in the United States; Bronze-rated  Swan Defined Risk (SDRAX), which takes a fairly systematic approach to its options usage; and Bronze-rated  Schooner (SCNAX), which has a more dynamic process.

Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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