What Is a Drag Fund
A drag fund is a type of investment vehicle designed to reduce the impact of market declines on a portfolio. It aims to limit downside risk while still participating in market upside, often using hedging strategies or low-volatility assets to smooth returns over time.
How a Drag Fund Works
Drag funds typically combine long positions in equities or other assets with defensive instruments such as options, futures, or fixed-income securities. The goal is to create a cushion that absorbs losses during sharp market drops, reducing the overall volatility experienced by investors.
Why Investors Use Drag Funds
Investors use drag funds to protect capital during uncertain or bearish markets. By lowering exposure to large downturns, these funds can help preserve wealth and reduce emotional decision-making. They are often used alongside growth-oriented investments to balance risk.
For more information on fund structures and investment strategies, visit Investopedia.
