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COLLX, the Collar Fund

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I previously discussed the idea of hiring a fund manager who runs a non-traditional mutual fund.  Specifically the post was about a covered call writing fund.

Today I'm posting about a fund that invests in collars.  This is a conservative strategy whose main purpose – in my opinion – is to protect the value of your assets.  The goal is to earn profits, but minimizing losses is the top priority.

"The Collar Fund (symbol: COLLX) is an open-ended, no load fund whose management fees are less than 1% per year.

Quoting directly from promotional material, their "investment services may suit a broad spectrum of investors: Retirees, baby boomers, or nervous investors who are willing to forgo some possible upside return in exchange for protection."

If you are interested in collars, and willing to pay a small management fee, take a look at what they offer.  [Disclosure: I receive nothing for mentioning this fund]

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Jefferies Group, a major global securities and investment banking group, recently (Jan 2010) published a report that compared how well various hedging strategies did their job – i.e., how well they protected a diversified stock portfolio. 

Among a variety of collars and put spreads (example buy a put that's 5% OTM and sell another that's 10% OTM), the 95/105* collar provided the best hedge in 2009.  Runner-up was the 90/110* collar.  These results are similar to those observed in earlier years.

*The 'numbers' that define a collar describe how far OTM  are the options that comprise the collar. 

A 95/105 collar owns  the 95 put – or the put whose strike price is 95% of the index price (in other words, is 5% out of the money) – and sells the 105 call (the call whose strike price is 105% of the value of the index (in other words, 5% OTM).

The report recommends (for 2010):

  • using collars or put spreads to hedge a portfolio
  • not buying put options because they are less effective as a hedge
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