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A Workaround for High Alternative Fund Fees

This simple trick can help you halve some alternative fund fees.

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Long-short equity funds can add useful diversification to an equity portfolio, but the strategy tends to come with a hefty price tag. The average long-short equity fund charges a whopping 1.85% expense ratio. Fees are, and have always been, the enemy of long-term returns, so it’s hard to blame anyone who considers a nearly 2% price tag a nonstarter. But with a little creativity, an investor can get a similar return profile from equity market-neutral funds at a much more appetizing price.

Equity market-neutral mutual funds are often touted as a fixed-income alternative, because of their low-return/low-volatility profile. Certainly, the category’s returns (1.25% annualized over the three-year period ended Aug. 31) and volatility (3.54% annualized standard deviation over the same period) look far more like bonds than stocks. But funds in the market-neutral Morningstar Category are fundamentally equity-based strategies, and with a relatively simple maneuver, it’s possible to transform an equity market-neutral fund into a long-short strategy with about half the fees. But first, a quick refresher on equity market-neutral strategies.

Jason Kephart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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