While inflation has been ebbing gradually over the past few months, the Federal Reserve has not yet signaled an end to its monetary policy tightening. In June, the Fed initiated a rate-hike pause. However, the central bank reverted to raising interest rates by announcing a 25 bps hike in its July meeting, and has not ruled out further hikes before the year ends. As a result, the market is going to remain volatile for a while as recession fears have not disappeared.
In such an environment, prudent investors often opt for market-neutral funds. A market-neutral fund seeks profit regardless of an upward or downward movement in the market, typically by pairing long and short positions or derivatives. They are extremely diversified.
In taking up a long position on a stock, one expects its price to increase over time so that it can be sold at a profit. In a short position, the price is expected to go down so that it can be bought later. The strategy involves taking simultaneous long and short positions, and taking advantage of available transactional opportunities.
This strategy balances short positions in losing stocks with long positions in outperforming stocks and is ideal for volatile markets like the one we are seeing currently. These funds also typically aim at attaining zero beta, i.e., the stock price’s movement in correlation to the market. The main objective is to reduce risk and not volatility, as market-neutral funds feed off volatility.
Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases.
We have thus selected three market-neutral funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and a low three-year beta, and carry a low expense ratio.
Victory Market Neutral Income Fund CBHAX seeks high current income by implementing a proprietary, rules-based investment strategy designed to seek income from its investments while maintaining neutrality to foreign and domestic markets.
Three top holdings for CBHAX are Softbank, Quanta Computer and Nan Ya Plastics, each holding 0.5%. Scott R. Kefer has been the lead manager of CBHAX since Oct 30, 2022.
CBHAX’s 3-year and 5-year annualized returns are 1.6% and 2.4%, respectively. Its net expense ratio is 0.75% compared to the category average of 2.30%. The 3-year beta score for the fund is 0.08. CBHAX has a Zacks Mutual Fund Rank #2.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Water Island Event-Driven Fund AEDFX follows a market-neutral strategy wherein it invests in equity and debt and debt-like instruments of companies whose prices might be impacted by a corporate event. AEDFX employs investment strategies designed to capture price movements generated by events like mergers, acquisitions, asset sales, restructurings, refinancings, recapitalizations, reorganizations, etc.
Three top holdings for AEDFX are 4.3% in Activision Blizzard, 3.8% in Duck Creek Technologies and 3.6% in Horizon Therapeutics. John S. Orrico has been the lead manager of AEDFX since Mar 30, 2018.
AEDFX’s 3-year and 5-year annualized returns are 2.9% and 3.1%, respectively. Its net expense ratio is 1.71% compared to the category average of 1.90%. The 3-year beta score for the fund is 0.13. AEDFX has a Zacks Mutual Fund Rank #1.
Calamos Market Neutral Income Fund CMNIX seeks high current income alongside stability of the principal investment amount by investing in convertible securities of U.S. companies, notwithstanding market capitalization. The average maturity term of the convertible securities purchased by CMNIX usually ranges from two to 10 years.
Three top holdings for CMNIX are 3.5% in Apple, 3.3% in Microsoft and 2.6% in Paolo Alto. John P. Calamos has been the lead manager of CMNIX since Sep 3, 1990.
CMNIX’s 3-year and 5-year annualized returns are 3.6% each, respectively. Its net expense ratio is 0.97% compared to the category average of 1.79%. The 3-year beta score for the fund is 0.20. CMNIX has a Zacks Mutual Fund Rank #1.
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