What is an all-weather fund?

Last Updated: 9 Jun 2022

Just like all-season shoes, all-weather funds are designed to perform well in every market condition. As the name suggests, it gives reasonably good returns in both favourable and unfavourable market and economic conditions. All-weather funds are created to have a very flexible asset allocation strategy.

The Origin of the all-weather fund

The All-Weather Fund goes back to the 1970s. Ray Dalio, the founder of Bridgewater Associates coined the term ‘All-Weather Fund’. He and his partner observed the market and developed a portfolio that would give good returns regularly.

By analyzing the market, they understood the behaviour of each asset class based on the market movements and economic conditions. The weights were assigned to each asset class which minimized the losses and gave returns throughout all the economic conditions.

They broke down each return generating stream into components, eventually designing an entire portfolio of different return generating components. This asset allocation strategy helped them build a passive investment portfolio that generated steady returns in each market condition.

How does an all-weather fund work?

The primary aim of an All-Weather Fund is to give good returns in all the conditions. Bad returns during downfall or stagflation can be hedged by investing in an asset class that gives good returns regularly. The portfolio of the fund is created by using an asset mix that gives capital appreciation as well as dividend income.

The fund managers allocate a certain amount in equity that is expected to grow during the bull run or in a good economic condition. The fund comprises debt instruments like government securities and bills that give fixed regular income.

In good economic conditions or bull runs, stocks are a good performer, while in recessionary sessions or cases like stagflation, government securities keep up the pace of guaranteed returns.

The strategy of all-weather funds

All-weather funds follow a simple strategy of hedging the possible downfalls with good income-generating assets. Creating a strategy like all-weather funds is not as difficult as it seems. As an investor, you can try out the following ways to follow an all-weather fund strategy.

Balanced Mutual Fund

An investor can invest in a balanced mutual fund. The asset allocation in a balanced mutual fund is designed to give good returns in any market situation. The fund managers may make variations in asset allocation according to market situation and economic scenario.

Long-short Strategy

Funds generally use the strategy of long-short to tackle market situations. If an asset is expected to grow, a fund manager generally follows the process of buying at a lower price and shorting the assets when it is expected to fall.

Neutral Approach

Staying neutral by playing in trading forms like derivatives or others can give good returns arising out of unexpected rises or falls in the market.

Final Words

All-Weather Funds can switch between multiple asset classes and have alternative investment strategies. It may perform sector rotation based on the market conditions. All-weather mutual funds deliver consistently good returns as compared to asset-specific funds, and it can be a lucrative investment avenue.

Frequently Asked Questions

Is it good to invest in all-weather funds?

All-weather funds not only give returns but also exposure to investing in diversified asset classes. If you are a new investor looking for appropriate returns, in the long run, all-weather funds are a good idea.

What are the benefits of all-weather funds?

All-weather funds hedge your investment against slowdowns in the market and economy. It also provides a multi-asset allocation strategy to get better returns and advantage of unexpected positive market movements.

The risk level is low in such funds, which is a good scenario to look at, for new investors.