In the last class are the Van Kampen Senior Loan, Eaton Vance Prime Rate Reserves and Franklin Floating Rate funds.
Floating rate funds have been around for more than a decade.
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If interest rates rise, active fixed-income investors could invest in short-term bonds, which tend to remain fairly stable in rising rate environments, or use floating rate funds, which are more insulated from the negative impact of rising rates.
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Floating-rate funds come in three varieties: open-end, closed-end and a hybrid of the two.
Investors who like the idea of floating-rate funds but not bank loans have a few other options.
Floating-rate funds are pools of bank loans made to companies, and the interest rates on those loans adjust as interest rates change.
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Money market mutual funds are exempt from SEC requirements that mutual funds maintain floating net asset values.
Still, floating-rate bond funds may be the best fixed-income deal available in an environment of rising short-term interest rates.
In the hopper are suggestions around floating net asset value, like other mutual funds, or adding in capital buffers and redemption controls.
To answer these fears, there has been an explosion in funds that specialize in bank loans (aka floating rate loans), including BlackRock Senior Floating Rate (BFRCX), RS Floating Rate (RSFLX) and Neuberger Berman Floating Rate (NFIAX).
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They also know that instituting a floating NAV will irreparably harm the utility and benefit of the funds.
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For individuals the good news is that there are mutual funds that make it easy to invest in diversified portfolios of floating-rate loans, mostly made by banks to corporations with less than investment-grade bond ratings.
Hedge funds do great work for bringing liquidity and precious market signals to the economy, but the simple truth is that absent the chaos wrought by floating money, the economy would require a great deal less in the way of hedge funds.
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Floating-rate, rather than fixed-rate, exchanges are going to require the holding of customer funds in national currencies.
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There are many theories floating around about why this has happened, but the inability to short stocks at a reasonable cost has robbed hedge funds of an integral strategy that distinguishes them from other money management products like mutual funds.
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