A Straightforward Guide to Hybrid Funds

By: Gridline Team | Published: 11/28/2022
Est. Reading Time:
3 minutes

Hybrid funds, also known as asset allocation funds, invest in two or more asset classes to provide stability and growth. In this guide, we'll explore the basics of hybrid funds, including how they work and how they can be used to achieve financial objectives.

What are the types of hybrid funds?

There are several types of hybrid funds at varying risk levels.

Aggressive hybrid funds invest 65-80% in equity and equity-related securities and the remainder in debt and cash. Balanced hybrid funds invest 50% in equities and the rest in debt and cash. Conservative hybrid funds invest just 10-25% in equities.

Equity savings funds are less risky and aim to achieve lower volatility with partially hedged equity positions. Arbitrage funds exploit the price differences between two different markets. For example, an arbitrage fund may invest in a company's equity and debt to take advantage of different interest rates.

Finally, multi-asset funds invest across asset classes, including public and private stocks, bonds, commodities, and real estate.

Why invest in hybrid funds?

Hybrid funds offer investors the potential for both stability and growth. They can help diversify a portfolio and provide exposure to different asset classes.

Hybrid funds also have the potential to outperform traditional equity and fixed-income investments in certain market conditions. For example, when interest rates are falling, bond prices typically rise. This means that a hybrid fund with a significant allocation to bonds may outperform a pure equity fund.

Moreover, exposure to alternative investments in a multi-asset fund can help to hedge against market risks and provide diversification benefits. Private markets consistently outperform public markets over the long term and can offer absolute return potential in all market conditions. In downturns, private markets have faster recoveries and shallower drawdowns than public markets.

The reasons for this are manifold; private companies are generally smaller, more agile, and focused on organic growth. They also have less debt, providing a natural hedge against rising interest rates. 

Furthermore, private companies tend to be owner-operated with a longer-term view, meaning they are less impacted by short-term market movements. Private companies can take a longer-term view of investments without the need for quarterly reporting, meaning they are less likely to engage in short-termism.

What are the risks of hybrid funds?

Like all investments, hybrid funds have risks that need to be considered.

The most significant risk is that the fund may not achieve its investment objectives and underperform other asset classes. For example, a balanced fund that invests 50% in equities may underperform if the equity markets rise by 10%, but the debt markets fall by 5%.

It's also important to remember that although hybrid funds offer exposure to different asset classes, they still carry the risk of over-concentration in a single asset or sector. For example, a fund that invests in both stocks and bonds at a time when private equity is booming may be over-concentrated in public markets.

How can I invest in hybrid funds?

Retail investors commonly invest in hybrid funds through mutual fund companies or exchange-traded funds (ETFs), which are traded on stock exchanges.

Institutional investors, such as pension funds and insurance companies, have larger allocations to private markets and hybrid funds. They commonly access these funds through private placement arrangements with fund managers.

Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.

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