Which regulation forbides mutual funds from selling to stay in cash?

Discussion in 'Professional Trading' started by crgarcia, Feb 25, 2008.

  1. Or even shorting?
  2. i have been looking for this one too. its really hard to find in a search, there are too many websites with the words like “mutual fund” and “short sale” in them, searches only return a list of things that dont help. add the word “regulation” to the mix and the results are about the uptick rule…

    come on now, somebody has got to know it… is it even true that mutual funds legally cant short and have to stay a certain % invested at all times? or maybe its just highly regulated and difficult for them? those get rich quick trading schools that promote themselves on paid programming really love to pump this issue, thats for damn sure.
  3. BJL


    Mutual funds are regulated by the Investment Company Act of 1940 which states that:

    SEC. 12. ø80a–12¿ (a) It shall be unlawful for any registered
    investment company, in contravention of such rules and regulations
    or orders as the Commission may prescribe as necessary or
    appropriate in the public interest or for the protection of
    (1) to purchase any security on margin, except such shortterm
    credits as are necessary for the clearance of transactions;
    (2) to participate on a joint or a joint and several basis in
    any trading account in securities, except in connection with an
    underwriting in which such registered company is a participant;
    (3) to effect a short sale of any security, except in connection
    with an underwriting in which such registered company is
    a participant

  4. BJL


    i don't think they have to be fully invested by law. however, they may have to be if that's in their stated investment policy.

    i'm sure there are balanced fund out there that switch from equities to cash/t-bills and vice versa.
  5. I think most funds stay near fully invested these days. I'd say the reasoning is that if you didn't want to invest in stocks, you'd sell the fund. In other words, how would you feel if you invested in a muitual fund thinking you were getting some exposure to stocks, the market then goes up, and you find out your mutual fund manager was sitting in cash. Would that bother you? LOL.

    So if you think stocks are going down, simply shift your money out of the fund into a money market fund.

    They can't sell short unless it is something that is covered in their prospectus. Some funds can. One that comes to mind is Ken Heebner's fund.

    But again, if you want to short, go ahead. Most of the investing public does not want to.

  6. Just thought I'd mention, this must not be the whole story because there are mutual funds who both margin and sell short. He's a link to the prospectus on Ken Heebner's Focus Fund, which does both:

  7. BJL


  8. Mutual fund managers are judged primarily on relative performance to their respective indices. Being in too much cash is a risky proposition for them; they don't want to miss a move and under perform their index. It's not regulatory.
  9. The fund must ultimately follow their written investment policy. If the fund says no more than 5% cash, then no more than 5% cash.

    Investors like to know what to expect when purchasing a fund, so the written rules are necessary.
  10. thank you everyone for your responses

    thats a good point, i never really thought about it that way. its always bothered me the other way around when they stay long as the market eats it. this puts it in a more 50/50 perspective.

    would that also then mean that they dont care too much if their fund eats it, just as long as it eats it less than the indices? kind of puts the whole mutual fund industry in a shady light... but i guess it really falls on the shoulders of the investors to demand more, which they are not doing.
    #10     Feb 27, 2008