Long-short bond funds look to invest in bonds and other fixed-income investments while hedging against rising interest rates. We currently use two funds to accomplish this: Driehaus Active Income and Driehaus Select Credit.
For the past several years—since the Federal Reserve all but flattened interest rates—retirees have had to make some tough choices: Invest in longer-term bonds with a higher yield but with more interest-rate risk, or in lower-quality, or junk, bonds with a higher yield but more credit risk.
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One example of a long-short bond strategy that Driehaus employs is buying longer-term corporate bonds to take advantage of the higher yields, then taking a portion of the portfolio and shorting Treasurys to hedge against rising interest rates. If and when interest rates increase, their short Treasury positions will add some protection against falling bond prices.
Over time, we hope to see this investment achieve half of the return of stocks with 33 percent of its volatility—very similar to what we expected from bonds a decade or two ago.