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3 Market-Neutral Funds to Reduce Risk Amid Volatility
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When a market is in a state of volatility, investors opt for a long-term strategy to mitigate the risk, rather than looking for quick money. In essence, they look to hedge risks and seek to invest in funds that reduce risk while providing returns spread over a period of time.
Market-neutral funds are designed to provide returns that are relatively unaffected by how the specific indexes or the overall stock market is faring because they are extremely diversified. They typically deliver returns by combining long and short positions in various securities by gaining from increasing as well as decreasing prices from one or more markets.
By taking up a long position, investors expect the stock price to increase over time so that they can sell these to gain from the price difference. When one short-sells, the stock price is expected to go down so that it can be bought later. The market-neutral 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 in relation to the market index.
The market has remained volatile for multiple reasons over the past couple of weeks. There has been uncertainty over whether the Fed is going to slow down its pace of interest rate hikes. However, recent developments have indicated that the central bank will remain steadfast in its bid to bring down inflation, which is still way above its target rate of 2%, by tightening its monetary policy.
The Republicans were expected to do well in the mid-term elections in the United States and the consequences had been priced in. With the results returning a surprise, the market has responded unfavorably. Also bearing down on the market was the collapse of the crypto-currency exchange FTX, with the government freezing its assets and Binance, its rival and potential buyer, walking away from a buy-out deal. This has sent shockwaves through the business world even as talks of an impending recession are raging. These are all the more reasons why one must opt for market-neutral funds, as they are typically low beta.
We have thus selected three market-neutral funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 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 (CBHIX - Free Report) 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 CBHIX are 0.8% in Far EasTone Telecommunications, 0.5% in Malayan Banking BHD and 0.5% in Emera Inc. Mannik Dhillon has been the lead manager of CBHIX since May 30, 2018.
CBHIX’s 3-year and 5-year annualized returns are 1.7% and 2.2%, respectively. Its net expense ratio is 0.43% compared to the category average of 2.3%. The 3-year beta score for the fund is 0.11. CBHIX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Vanguard Market Neutral Fund (VMNFX - Free Report) follows a market-neutral strategy wherein it produces a portfolio that is neutral with respect to general stock market risk. This is sometimes referred to as beta neutrality.
Three top holdings for VMNFX are 0.8% in AMN Healthcare Services, 0.8% in Korn Ferry and 0.8% in American Financial Group. Binbin Guo has been the lead manager of VMNFX since Apr 27, 2016.
VMNFX’s 3-year and 5-year annualized returns are 5.3% and 1.6%, respectively. Its net expense ratio is 1.6% compared to the category average of 2.3%. The 3-year beta score for the fund is 0.00. VMNFX has a Zacks Mutual Fund Rank #1.
Calamos Market Neutral Income Fund (CVSIX - Free Report) 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 CVSIX usually ranges from two to 10 years.
Three top holdings for CVSIX are 3.7% in Apple, 3.6% in SPDR S&P 500 ETF Trust and 3.2% in Microsoft. Jason Hill has been the lead manager of CVSIX since Aug 4, 2013.
CVSIX’s 3-year and 5-year annualized returns are 1% and 2.2%, respectively. Its net expense ratio is 1.1% compared to the category average of 1.8%. The 3-year beta score for the fund is 0.21. CVSIX has a Zacks Mutual Fund Rank #2.
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3 Market-Neutral Funds to Reduce Risk Amid Volatility
When a market is in a state of volatility, investors opt for a long-term strategy to mitigate the risk, rather than looking for quick money. In essence, they look to hedge risks and seek to invest in funds that reduce risk while providing returns spread over a period of time.
Market-neutral funds are designed to provide returns that are relatively unaffected by how the specific indexes or the overall stock market is faring because they are extremely diversified. They typically deliver returns by combining long and short positions in various securities by gaining from increasing as well as decreasing prices from one or more markets.
By taking up a long position, investors expect the stock price to increase over time so that they can sell these to gain from the price difference. When one short-sells, the stock price is expected to go down so that it can be bought later. The market-neutral 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 in relation to the market index.
The market has remained volatile for multiple reasons over the past couple of weeks. There has been uncertainty over whether the Fed is going to slow down its pace of interest rate hikes. However, recent developments have indicated that the central bank will remain steadfast in its bid to bring down inflation, which is still way above its target rate of 2%, by tightening its monetary policy.
The Republicans were expected to do well in the mid-term elections in the United States and the consequences had been priced in. With the results returning a surprise, the market has responded unfavorably. Also bearing down on the market was the collapse of the crypto-currency exchange FTX, with the government freezing its assets and Binance, its rival and potential buyer, walking away from a buy-out deal. This has sent shockwaves through the business world even as talks of an impending recession are raging. These are all the more reasons why one must opt for market-neutral funds, as they are typically low beta.
Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three market-neutral funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 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 (CBHIX - Free Report) 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 CBHIX are 0.8% in Far EasTone Telecommunications, 0.5% in Malayan Banking BHD and 0.5% in Emera Inc. Mannik Dhillon has been the lead manager of CBHIX since May 30, 2018.
CBHIX’s 3-year and 5-year annualized returns are 1.7% and 2.2%, respectively. Its net expense ratio is 0.43% compared to the category average of 2.3%. The 3-year beta score for the fund is 0.11. CBHIX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Vanguard Market Neutral Fund (VMNFX - Free Report) follows a market-neutral strategy wherein it produces a portfolio that is neutral with respect to general stock market risk. This is sometimes referred to as beta neutrality.
Three top holdings for VMNFX are 0.8% in AMN Healthcare Services, 0.8% in Korn Ferry and 0.8% in American Financial Group. Binbin Guo has been the lead manager of VMNFX since Apr 27, 2016.
VMNFX’s 3-year and 5-year annualized returns are 5.3% and 1.6%, respectively. Its net expense ratio is 1.6% compared to the category average of 2.3%. The 3-year beta score for the fund is 0.00. VMNFX has a Zacks Mutual Fund Rank #1.
Calamos Market Neutral Income Fund (CVSIX - Free Report) 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 CVSIX usually ranges from two to 10 years.
Three top holdings for CVSIX are 3.7% in Apple, 3.6% in SPDR S&P 500 ETF Trust and 3.2% in Microsoft. Jason Hill has been the lead manager of CVSIX since Aug 4, 2013.
CVSIX’s 3-year and 5-year annualized returns are 1% and 2.2%, respectively. Its net expense ratio is 1.1% compared to the category average of 1.8%. The 3-year beta score for the fund is 0.21. CVSIX has a Zacks Mutual Fund Rank #2.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>