2 of the Best in the Misunderstood Market Neutral Category
Market-neutral funds could be good diversifiers, but most are hindered by high expense ratios.
Market-neutral funds could be good diversifiers, but most are hindered by high expense ratios.
Jason Kephart: Market neutral funds are some of the most misunderstood funds we cover here at Morningstar. These funds make an equal number of long and short bets on stocks to isolate a manager's ability to pick either individual companies or sectors. By going equally long and short, the fund's net exposure to stock should be 0%. That means when stocks are going up or down, that shouldn't really affect whether these strategies are making money or not. That makes them a pretty good diversifier.
Since the funds do have 0% exposure to stocks, though, a benchmark like the S&P 500 doesn't really make sense. Instead, investors should compare these funds to something like a short-term bond fund or an intermediate-term bond index, like the Barclays Aggregate Index.
The biggest challenge these funds face is their high expense ratios. The average fund in the category charges 1.66%; that's a really high hurdle for a fund whose historical returns look more like a short-term bond fund than a stock fund.
There are a couple of good funds in the category, however. We like Vanguard Market Neutral, which charges 25 basis points, and BlackRock Global Long/Short Equity, which charges 1.60%. Both these funds have proven they can outperform after their expense ratio. They both have Morningstar Analyst Ratings of Bronze.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.