To identify mutual funds that typically rise in value when the stock market falls, it is useful to recognize asset classes that are uncorrelated to equities. Investment categories such as fixed income and commodities are two such asset classes. While there is no guarantee that bond or commodity mutual funds will in fact rise, there is a likelihood that this will occur. Bonds and commodities tend to respond to separate economic developments in comparison with the stock market.
While the stock market is the most common place for individuals and institutions to invest, equities are not the only asset class. Commodities, such as agricultural and energy assets, are not driven by corporate profits, which are among the key motivators of stock market performance. Instead, commodity prices are influenced by factors such as the weather, resource supply, and demand, as well as by international trade conditions. Bonds are part of the fixed income asset class, and, unlike stocks, are influenced by factors such as interest rates, regional economic growth, and inflation.
As of 2011, professional investment managers were increasingly willing to incorporate alternative assets, including commodities and currencies, into their clients' portfolios, according to a 2011 article on the Advisor One website. An interest in commodity mutual funds stemmed from stock market losses that were experienced during 2008 and 2009 when the economy was in recession. Money managers were seeking alternative-asset mutual funds because of their non-correlated nature to traditional investments, such as stocks, and as a means to guard against market losses.
In 2010, 60 percent of assets being invested into mutual funds were being directed into bond funds, according to Strategic Insight data cited in a 2010 article on the Advisor One website. Investors were turning to long-duration bonds, which deliver returns over a period of years ranging from one-to-three decades, because of the investment risk associated with the stock market. The strategy paid off; according to a 2011 article on the Bloomberg website, bonds generated returns of just over 6 percent through October 31, 2011, compared with returns of just over 2 percent in the S&P 500 Index, which is a gauge of stock market activity.
One way that investors can take advantage of a stock market that is declining in value is to invest in mutual funds that trade similar to hedge funds. Hedge funds are investment vehicles that use strategies such as shorting to make money even when the markets decline. Mutual fund shorting strategies include not only betting that a stock price will rise, but also hedging those bets with short positions. Shorting involves placing bets that stocks will decline in value, and also using debt to increase returns when stock prices do in fact fall.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.