Fidelity Expands Alternative Investments with New Hedged Equity Fund: A Smart Move for Volatile Markets?

In today’s unpredictable market, investors are constantly seeking strategies to navigate volatility while still aiming for growth. Fidelity Investments, a well-known name in the financial world, is expanding its arsenal of investment options with a new offering designed to do just that. Introducing the Fidelity Hedged Equity Fund (FEQHX), a fresh addition to their alternative investments lineup. Let’s dive into what this fund is all about and how it could potentially fit into your investment strategy.

What is the Fidelity Hedged Equity Fund (FEQHX)?

Fidelity’s latest fund, the Hedged Equity Fund (FEQHX), is engineered to provide investors with a unique blend of equity market exposure and downside risk mitigation. According to the official announcement, FEQHX aims to mirror the risk-return profile of the S&P 500 Index, but with a crucial layer of protection against market downturns. This makes it an intriguing option for investors looking for equity-like returns without the full brunt of market drops.

Think of it this way: you want to participate in the potential upside of the stock market, but you’re also wary of significant losses when things take a turn for the worse. The Fidelity Hedged Equity Fund is designed to act as a potential solution to this common investor dilemma.

Who Can Invest in the Fidelity Hedged Equity Fund?

Good news for both financial professionals and individual investors! The Fidelity Hedged Equity Fund is accessible to a broad range of investors. Initially launched for financial advisors, Fidelity has now made this fund, along with the Fidelity Macro Opportunities Fund (FAQAX) and Fidelity Risk Parity Fund (FAPSX), available to retail investors.

This wider availability underscores Fidelity’s commitment to democratizing access to alternative investment strategies, which were once primarily the domain of institutional investors or high-net-worth individuals. Now, through Fidelity’s online brokerage platforms, both advisors and individual investors can purchase these three alternative funds commission-free.

How Does the Fidelity Hedged Equity Fund Work?

The fund is managed by Fidelity Diversifying Solutions LLC, a specialized arm within Fidelity created to focus on alternative investment product development. This dedicated team emphasizes strategies that can diversify portfolios beyond traditional stocks and bonds.

Instead of relying solely on conventional mutual fund approaches, the Fidelity Hedged Equity Fund employs more sophisticated investment and trading techniques. The core strategy revolves around what’s described as an “always on,” long-only, diversified put protection overlay approach.” Let’s break down what this means:

• “Always On” Protection: The downside protection isn’t something that’s switched on and off based on market predictions. It’s a continuous strategy integrated into the fund.
• Long-Only Equity Portfolio: The fund invests in equities, aiming for market participation similar to the S&P 500.
• Diversified Put Protection Overlay: This is the key element. The fund uses put options across a diversified portfolio to create a buffer against market declines. Put options essentially give the fund the right to sell assets at a specific price, thus limiting potential losses during downturns.

Essentially, the fund aims to capture a significant portion of market upside while having a built-in mechanism to cushion the blow during market drops. This is particularly relevant because market volatility often unfolds in two phases: the initial sharp decline followed by a period of recovery. The fund’s strategy is designed to navigate both phases effectively – limiting losses in the downturn and participating in the subsequent rebound.

Benefits of the Fidelity Hedged Equity Fund

• Downside Protection: The primary benefit is the intended reduction of losses during market downturns. This can be particularly appealing for risk-averse investors or those nearing retirement.
• Equity Market Participation: Unlike purely defensive strategies, this fund still aims to capture a significant portion of equity market gains. It’s not about avoiding the market altogether, but rather about participating more cautiously.
• Diversification: Adding alternative investments like this fund can enhance portfolio diversification, potentially reducing overall portfolio risk.
• Accessibility: The fund’s availability to retail investors through Fidelity’s platform makes sophisticated hedging strategies more accessible to a wider audience.
• Managed by Experts: Fidelity Diversifying Solutions LLC, a dedicated team within Fidelity, manages the fund, bringing specialized expertise in alternative investments.

Potential Considerations

While the Fidelity Hedged Equity Fund offers compelling benefits, it’s important to consider potential aspects:

• Cost of Protection: Hedging strategies are not free. The put option overlay will have a cost, which could potentially slightly reduce overall returns compared to a pure S&P 500 index fund in strongly rising markets.
• Complexity: Alternative investments and hedging strategies can be more complex than traditional investments. Investors should ensure they understand the fund’s approach and how it works.
• Not Complete Downside Elimination: “Downside protection” doesn’t mean losses are completely eliminated. It aims to mitigate losses, but the fund can still experience negative returns in adverse market conditions.
• Performance Relative to S&P 500: While aiming for S&P 500-like returns with less volatility, the fund’s performance may deviate from the S&P 500, especially during periods of strong market trends (either up or down).

Fidelity’s Broader Push into Alternatives

The launch of the Fidelity Hedged Equity Fund, along with making the Fidelity Macro Opportunities Fund and Fidelity Risk Parity Fund available to retail investors, signals a broader strategic direction for Fidelity Investments. They are clearly expanding their offerings in the alternative investment space.

This trend reflects the growing demand from investors for strategies that can navigate complex and volatile market environments. Alternative investments, which can include hedge funds, private equity, real estate, and now more accessible options like these Fidelity funds, are increasingly seen as valuable tools for diversification and risk management.

Conclusion: Is the Fidelity Hedged Equity Fund Right for You?

The Fidelity Hedged Equity Fund (FEQHX) presents an interesting proposition for investors seeking a balance between equity market participation and downside risk control. Its “always on” put protection strategy is designed to navigate market volatility, potentially offering a smoother investment journey.

If you are looking for:

• Equity exposure but with reduced downside risk.
• Diversification beyond traditional stocks and bonds.
• An alternative to purely passive S&P 500 tracking funds, especially in uncertain market conditions.

Then the Fidelity Hedged Equity Fund could be worth exploring further. As with any investment, it’s crucial to understand the fund’s strategy, consider your own risk tolerance and investment goals, and perhaps consult with a financial advisor to determine if FEQHX aligns with your overall portfolio strategy. Fidelity’s move to expand its alternative investment offerings makes sophisticated strategies more accessible, empowering investors to build more resilient and diversified portfolios in today’s dynamic market landscape.