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3 Market-Neutral Funds to Sail Through an Edgy Market
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Continuous volatility on Wall Street drew the major indexes close to the bearish territory, with the Dow, and the S&P 500 closing at their lowest level since March 2021 on May 19.
Monthly inflation rates denoted by the Consumer Price Index “CPI” came in at 0.3% for the month of April, the highest in 40 years. Rising interest rate to counter inflation remains the biggest concern for investors, especially since U.S GDP fell 1.4% annualized in the first quarter of 2022. Any further aggressive moves by the Federal Reserve could push the economy into a recession, threatening the stock market. In fact, the Fed has already started to increase interest rates in a steady manner.
China’s first-quarter GDP, came in at 4.8%, with several cities in that county under strict lockdown due to fresh threats from Covid-19 mutation. Also, the unemployment rate rose to 6% in March from 5.4% in February. These bottlenecks along with other factors have compelled major investment banks like Goldman Sachs and Citi bank to downgrade China’s GDP forecast. The United States, being one of the biggest trade partners of China, should also face a repercussion effect.
Russia’s war against Ukraine, too, has led to further weakening of the post-pandemic recovery and a global supply chain disruption. This has impacted corporate profits as companies will take time to overcome regulatory, financial, and technology hurdles.
Thus, looking at the current volatility in the U.S. stock market, a market-neutral fund is particularly relevant for protecting one’s invested capital. This type of fund provides stable returns at relatively lower levels of risk regardless of market direction.
Market-neutral funds are designed to adopt a more precise approach by shorting 50% of the assets and holding 50% long. This method seeks to identify pairs of assets which has related price movements. The fund goes long on the outperforming asset and shorts the underperformer.
For example, take a $1 million long position in Eli Lilly and a $1 million short position in Bayer both of which are large pharmaceutical companies. If pharmaceutical stocks fall, you will lose because of your long position in Eli Lilly but gain from the short position in Bayer.
Thus, we have selected three such market-neutral mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
The Arbitrage Fund (ARGAX - Free Report) invests most of its net assets in equity securities of companies that have publicly announced mergers, takeovers, spin-offs, and other corporate reorganizations.
John S. Orrico has been the lead manager of ARGAX since Sep 18, 2000, Most of the fund’s exposure is in sectors such as Technology, Industrial cyclical, and Finance as of 4/30/2022.
ARGAX’s three-year and five-year annualized returns are nearly 4.7% and 3.8%, respectively. ARGAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.51%, which is less than the category average of 1.9%.
To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
BlackRock Event Driven Equity Fund Investor A Shares (BALPX - Free Report) is known for investing the majority of its assets in equity securities and related derivative instruments with similar economic characteristics which have announced or undergoing material changes. BALPX aims to achieve long-term capital appreciation.
Mark McKenna has been the lead manager of BALPX since May 6, 2015, and most of the fund’s exposure is in sectors such as Industrial Cyclical, Health, and Non-Durable as of 4/30/2022.
BALPX’s three-year and five-year annualized returns are 3.5% and 4.0%, respectively. BALPX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.41%, less than the category average of 1.9%.
Victory Market Neutral Income Fund Class A (CBHAX - Free Report) seeks to achieve its objective by investing in market-neutral, rules-based proprietary investment strategy in the domestic and foreign equity and bond market.
Mannik S. Dhillon has been the lead manager of CBHAX since May 31, 2018, and most of the fund’s exposure is in sectors such as Finance, Utilities, and Industrial Cyclical as of 4/30/2022.
CBHAX’s three-year and five-year annualized returns are 3.2% and 3.3%, respectively. CBHAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.78%, compared to the category average of 2.3%.
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3 Market-Neutral Funds to Sail Through an Edgy Market
Continuous volatility on Wall Street drew the major indexes close to the bearish territory, with the Dow, and the S&P 500 closing at their lowest level since March 2021 on May 19.
Monthly inflation rates denoted by the Consumer Price Index “CPI” came in at 0.3% for the month of April, the highest in 40 years. Rising interest rate to counter inflation remains the biggest concern for investors, especially since U.S GDP fell 1.4% annualized in the first quarter of 2022. Any further aggressive moves by the Federal Reserve could push the economy into a recession, threatening the stock market. In fact, the Fed has already started to increase interest rates in a steady manner.
China’s first-quarter GDP, came in at 4.8%, with several cities in that county under strict lockdown due to fresh threats from Covid-19 mutation. Also, the unemployment rate rose to 6% in March from 5.4% in February. These bottlenecks along with other factors have compelled major investment banks like Goldman Sachs and Citi bank to downgrade China’s GDP forecast. The United States, being one of the biggest trade partners of China, should also face a repercussion effect.
Russia’s war against Ukraine, too, has led to further weakening of the post-pandemic recovery and a global supply chain disruption. This has impacted corporate profits as companies will take time to overcome regulatory, financial, and technology hurdles.
Thus, looking at the current volatility in the U.S. stock market, a market-neutral fund is particularly relevant for protecting one’s invested capital. This type of fund provides stable returns at relatively lower levels of risk regardless of market direction.
Market-neutral funds are designed to adopt a more precise approach by shorting 50% of the assets and holding 50% long. This method seeks to identify pairs of assets which has related price movements. The fund goes long on the outperforming asset and shorts the underperformer.
For example, take a $1 million long position in Eli Lilly and a $1 million short position in Bayer both of which are large pharmaceutical companies. If pharmaceutical stocks fall, you will lose because of your long position in Eli Lilly but gain from the short position in Bayer.
Moreover, 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).
Thus, we have selected three such market-neutral mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
The Arbitrage Fund (ARGAX - Free Report) invests most of its net assets in equity securities of companies that have publicly announced mergers, takeovers, spin-offs, and other corporate reorganizations.
John S. Orrico has been the lead manager of ARGAX since Sep 18, 2000, Most of the fund’s exposure is in sectors such as Technology, Industrial cyclical, and Finance as of 4/30/2022.
ARGAX’s three-year and five-year annualized returns are nearly 4.7% and 3.8%, respectively. ARGAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.51%, which is less than the category average of 1.9%.
To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
BlackRock Event Driven Equity Fund Investor A Shares (BALPX - Free Report) is known for investing the majority of its assets in equity securities and related derivative instruments with similar economic characteristics which have announced or undergoing material changes. BALPX aims to achieve long-term capital appreciation.
Mark McKenna has been the lead manager of BALPX since May 6, 2015, and most of the fund’s exposure is in sectors such as Industrial Cyclical, Health, and Non-Durable as of 4/30/2022.
BALPX’s three-year and five-year annualized returns are 3.5% and 4.0%, respectively. BALPX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.41%, less than the category average of 1.9%.
Victory Market Neutral Income Fund Class A (CBHAX - Free Report) seeks to achieve its objective by investing in market-neutral, rules-based proprietary investment strategy in the domestic and foreign equity and bond market.
Mannik S. Dhillon has been the lead manager of CBHAX since May 31, 2018, and most of the fund’s exposure is in sectors such as Finance, Utilities, and Industrial Cyclical as of 4/30/2022.
CBHAX’s three-year and five-year annualized returns are 3.2% and 3.3%, respectively. CBHAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.78%, compared to the category average of 2.3%.
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 >>