Market neutral funds aim to invest in bullish stocks and an equivalent number of bearish stocks. The objective is to generate above-average returns at relatively lower levels of risk. In fact, this category of funds adopts a precision approach to long-short investing, by ignoring the market’s direction. This is particularly relevant in today’s highly volatile market scenario when the objective is to protect the capital invested. This approach aims to identify pairs of assets whose price movements are related. Subsequently, the fund goes long on the outperforming asset and shorts the underperformer. Market neutrality is achieved by allocating the same proportion of assets to both positions. (Read: Don’t Ride It All on the Bull: 2 Market Neutral Fund to Buy)
Below we will share with you 3 top rated market neutral mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all market neutral funds, investors can click here to see the complete list of funds.
Gateway A (GATEX) seeks to achieve maximum return from equity market with less risk. The fund focuses on acquiring common stocks to add to its well diversified portfolio. The fund invests a significant share of its assets in index call options in order to reduce volatility and maintain steady cash flow. However, it may also reduce fund’s profit making ability. This market neutral mutual fund returned 4.3% in the last one year period.
The fund has an expense ratio of 0.94% as compared to category average of 1.90%.
Calamos Market Neutral Income A (CVSIX) invests in equity securities of domestic companies irrespective of their market capitalization. The fund also invests in employs short selling to reduce market risk and generate more income. Its average maturity varies within the range of 2 to 10 years. It may also invest a major portion of its assets in junk bonds. This market neutral mutual fund returned 2.7% in the last one year period.
As of September 2014, this fund held 743 issues with 2.34% of its assets invested in Apple Inc.
Virtus Dynamic AlphaSector A (EMNAX) seeks long term capital growth. The fund achieves its objective by taking long and short positions in ETFs and/or stocks representing the nine primary sectors of the S&P 500 Index. It utilizes a proprietary quantitative model that seeks to evaluate price trends within each sector, while eliminating fluctuations in price and volume in the market that can confuse interpretations of market direction. This market neutral mutual fund returned 3.6% in the last one year period.