Mutual Funds For Momentum Investors

Mutual funds are contrary to the whole idea of momentum investing. Those who are attracted to the momentum style of investing like a lot of action and want quick, substantial rewards, neither of which is likely to happen with mutual funds. The sheer size of most mutual funds makes momentum investing impractical. Most fund managers need to be able to invest million of dollars in each position, which prevents them from moving in and out of stocks quickly. And, of course, moving quickly is the essence of momentum investing.

Of course, you can look for funds with short-term performance as their most important goal or look for a money manager who has a momentum style in the stock market today. That kind of fund may give you the flavor of momentum investing, but it’s a bit like riding Amtrak cross-country when you’ve got your heart set on riding a roller coaster at Coney Island.

An exchange-traded fund (ETF) provides a bit more action, even though it is made up of a specific basket of stocks that never changes. A momentum-oriented investor might identify a sector that has momentum and buy an ETF that represents that sector.

If you’re as accredited investor – that is, have a net worth of at least $1 million or an annual income of $200,000 or more – hedge funds are a possibility. Hedge funds have fewer regulations than do mutual funds, which means hedge fund managers have more freedom to use aggressive portfolio techniques, such as shorting, margin, or outright borrowing, and hedge funds need not diversify as much as the typical mutual funds has to.