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True enough, but where does the prospectus come from? In the case of an index fund, clearly the fund has to follow the index. However other funds can certainly have a prospectus that allows a lot of cash and also hedging with options. Unfortunately, they do not, for the most part. One exception is "long-short" funds, but these have not performed very well, at least when I last looked at them.

Investors have to know what they are buying and not be subjected to the risk of the whim of the manager. There are absolute return funds that generally have the freedom to go anywhere but if you are buying a fund (or more accurately a fund manager) to manage 25% of your portfolio that you want invested in US large cap growth, you ABSOLUTELY do not want to wake up one morning and find out that the manager has the majority of their holdings in Europe because they decided they wanted to be a contrarian.
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