We have been discussing for some time about how traditional mutual funds are employing hedge fund type strategies. Indeed there is a name for that type of funds, i.e. hybrid funds.

Eleanor Laise in the Wall Street Journal reports on another related trend.  Apparently a number of mutual fund companies are looking to increase the flexibility of their investment mandates.

Funds’ proposals for loosening investment rules have generally won shareholder approval. But many investors may be unaware that their mutual fund plans to adopt new investment strategies. To be sure, fund companies generally solicit votes for proposed changes by sending proxy statements, but often shareholders ignore these.

While this is an interesting trend it raises another question. What effect will this increased flexibility have on the widely used equity style box categories? Morningstar has created a new category for hybrid funds, but this will also affect the comparison of funds against their style box category.

For example a fund that has the flexibility to short stocks or write calls against their holdings will have a different return profile than a fund that is long stocks in a certain equity style box.

Many have complained that about the ‘tyranny’ of style boxes, in that it forces portfolio managers to bypass an interesting investment opportunity if it falls too far out of its mandated style. If enhanced investing techniques make style box comparisons less valuable it may lead to a more nuanced approach to measuring fund manager performance.