Question

You are a portfolio manager for a $500 million stock mutual fund. The majority of your research information predicts a downturn in the market soon. However, you remain bullish for the long-term. You know that all too often, when the portfolio declines in value, the redemptions significantly increase. What alternatives do you see?

Answer 1

The stock mutual fund might undergo redemptions during a period of downturn and this might be prevented by ensuring that the portfolio value does not go down significantly. This can be done by hedging the portfolio and taking the opposite position or shorting the stocks so that the portfolio do not go down during a recession.

Also, sufficient amount of portfolio amount has to be maintained in cash to ensure there should not be any liquidity issue when redemptions rise.

Lastly, a concerted campaign to make the investors aware needs to be undertaken to ensure that the investors remain invested and don't panic and take a long term view of the portfolio.