Market Neutral Fund

Market neutral fund is a type of mutual fund that aims at delivering excellent returns. What this type of mutual fund does is it balances bearish stock picks with bullish ones. The interest proceeds from short securities sales can also result in income. The purpose of Market neutral fund is to produce returns that are steady and a minimum of 3 - 6% higher than the T-bill rate. It is also possible for market neutral funds to cough up return that are akin to leveraged ETFs. These aspire to produce between 200 – 300% returns on investments.

To be called market neutral, an investment strategy must be looking to avoid a type of market risk completely. This is usually done by hedging. In order to evaluate market-neutrality, it is required to specify the risk to be avoided. A good example of this is convertible arbitrage which tries to completely hedge fluctuations of the underlying common stock’s price.

For a portfolio to be considered completely market neutral it should show absolutely no correlation with the risk in question. Market neutrality is hardly ever possible in practice. It is more a theoretical possibility of an ideal situation. In case a portfolio seems to be market-neutral, it may show certain correlations, which are unexpected, as market conditions change. Basis risk is the risk of this happening.

Market neutral funds are not simple products, they can be quite complex. If you are a conservative investor, this may not be the right choice for you. They offer an investing strategy that’s found typically in separately managed accounts and hedge funds. The turnover as well as fees tend to be higher in the case of market neutral funds. It is important for investors to take both into account while considering the option of market neutral funds.

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