Market-Neutral Funds: Understanding a Low-Correlation Investment Strategy

The market-neutral fund is one that has picked up steam in recent years with investors. The market-neutral fund aims to eliminate correlation to the traditional stock market while attempting to provide a good return on investment at the same time. Here are the basics of the market-neutral fund and how it could help you as an investor.

The Market-Neutral Fund

Over the last several years, many investors have been scared away from the stock market and other traditional investments. To many investors, it seems like no matter which stocks they buy, they are subject to the overall risk of the market itself. For that reason, an alternative that is not tied to the stock market can be very appealing to many investors. With this type of fund, you can gain access to an investment that does not depend on the ups and downs of the stock market in order to profit. You will be able to steadily build your portfolio, even during an economic downturn that has stock investors in trouble.

How It Works

There are a number of ways that market-neutral funds achieve gains, without submitting themselves to stock market correlation. One of the most common is with the use of a long-short stock portfolio. With this strategy, you buy an equal amount of shares with long position and short position stocks. This is also referred to as hedging. Therefore, regardless of whether the market goes up or down, your capital will remain unaffected.

In addition to the long-short portfolio, these funds also utilize other markets to bring in returns. For example, the foreign currencies market is a very popular alternative to diversify away from the stock market. While it can be affected by the stock market, as part of a larger portfolio, it is possible to diversify risk away from it. You can also invest in uncorrelated currencies that are not nearly as affected by the domestic stock market.

Commodities are another prime area of investment for this type of fund. For example, by holding gold or silver in the portfolio, you can bring in steady gains without being subject to the risks of the stock market. Gold and silver are not highly correlated to any other form of investment in the world.

Costs

With this type of fund, you will typically incur slightly higher costs than you would with other mutual funds. The strategies are implemented with these funds are considered to be more competition than what a normal mutual fund would employ. Therefore, the fund managers may require a slightly higher fee than you would expect. However, it is usually only 1% or less of an increase over traditional funds.

Investment Considerations

As an investor, this should be something that you consider as part of your portfolio. While you may not want to get completely away from the stock market, this will give you a nice complement to it that does not depend on it. Therefore, even if the stock market crashes, part of your portfolio will remain intact.