What is a Foul Weather Fund?
A foul weather fund is a mutual fund that outperforms the market during poor market conditions. The goal of the fund is to minimize or benefit from the effects of a downward move in the market.
How Does a Foul Weather Fund Work?
Capable of hedging the risks of bear markets with the potential to even buck a downward trend, foul weather funds generally comprise investments that maintain a solid market value and display narrower price fluctuations. Such items include stable blue chip stocks and stocks that consistently correlate inversely with the stock market. Foul weather funds are also likely to contain fixed-income items, including bonds, which hold or increase in value due to declining interest rate levels that are characteristic of bear markets.
Why Does a Foul Weather Fund Matter?
A foul weather fund provides investors with a tool for hedging the risk of loss associated with an unfavorable market climate. Investors should be aware that the items comprised in a foul weather fund, as with any fund, have the potential to perform poorly under certain circumstances.