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3 Market-Neutral Funds to Mitigate Risk Amid Volatility
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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. These funds have the potential to mitigate market risk as they take into account all market environments. They are extremely diversified. They typically deliver returns by combining long and short positions in various securities by gaining from increasing and decreasing prices from one or more markets.
This is just the long-term strategy investors are looking to adopt in volatile markets. Rather than vying for maximizing profits, they look to hedge risks and seek to invest in funds that reduce risk while providing returns spread over a period of time.
When investors take up a long position on a stock, they expect its price to increase over time so that it can be sold to gain from the price difference. 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. It broadly employs two strategies, Fundamental Arbitrage and Statistical Arbitrage. In the former, a fund manager focuses on the qualitative fundamentals of a stock to take up a position, whereas, in the latter, it uses hard quantitative analysis and industry trends.
The market has remained volatile for multiple reasons throughout February as opposed to a blockbuster start to the year. Inflation has resumed its climb northward, and market participants are weary that the Federal Reserve might revert to its policy of rapid interest rate hikes to tackle inflation. Investors are concerned that this might land the economy in a soup and a recession may be looming large.
In such an environment, markets are slated to remain volatile in the immediate future, a far cry from the upbeat mood of January. This backdrop makes investing in market-neutral funds an attractive proposition, as they typically have a low beta. Also, the volatility of the stock price movement is often essential for a successful market-neutral strategy. The main objective is to reduce risk and not volatility.
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 (CBHCX - 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 CBHCX are 0.5% each in BCE, Malayan Banking BHD, and Siam Cement. Mannik Dhillon has been the lead manager of CBHICX since May 30, 2018.
CBHCX’s 3-year and 5-year annualized returns are 1.3% and 1.9%, respectively. Its net expense ratio is 1.53% compared to the category average of 2.30%. The 3-year beta score for the fund is 0.11. CBHCX 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 - Free Report) 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 5.1% in Change Healthcare, 4.2% in Alleghany and 3.5% in Activision Blizzard. Todd W. Munn has been the lead manager of AEDFX since Sep 30, 2010.
AEDFX’s 3-year and 5-year annualized returns are 4.2% and 3.2%, 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 0.16. AEDFX 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 5.1% in Vanguard S&P 500 ETF, 3.2% in Apple and 2.5% 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 2.4% and 2.8%, respectively. Its net expense ratio is 1.2% 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 Mitigate Risk Amid Volatility
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. These funds have the potential to mitigate market risk as they take into account all market environments. They are extremely diversified. They typically deliver returns by combining long and short positions in various securities by gaining from increasing and decreasing prices from one or more markets.
This is just the long-term strategy investors are looking to adopt in volatile markets. Rather than vying for maximizing profits, they look to hedge risks and seek to invest in funds that reduce risk while providing returns spread over a period of time.
When investors take up a long position on a stock, they expect its price to increase over time so that it can be sold to gain from the price difference. 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. It broadly employs two strategies, Fundamental Arbitrage and Statistical Arbitrage. In the former, a fund manager focuses on the qualitative fundamentals of a stock to take up a position, whereas, in the latter, it uses hard quantitative analysis and industry trends.
The market has remained volatile for multiple reasons throughout February as opposed to a blockbuster start to the year. Inflation has resumed its climb northward, and market participants are weary that the Federal Reserve might revert to its policy of rapid interest rate hikes to tackle inflation. Investors are concerned that this might land the economy in a soup and a recession may be looming large.
In such an environment, markets are slated to remain volatile in the immediate future, a far cry from the upbeat mood of January. This backdrop makes investing in market-neutral funds an attractive proposition, as they typically have a low beta. Also, the volatility of the stock price movement is often essential for a successful market-neutral strategy. The main objective is to reduce risk and not volatility.
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 (CBHCX - 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 CBHCX are 0.5% each in BCE, Malayan Banking BHD, and Siam Cement. Mannik Dhillon has been the lead manager of CBHICX since May 30, 2018.
CBHCX’s 3-year and 5-year annualized returns are 1.3% and 1.9%, respectively. Its net expense ratio is 1.53% compared to the category average of 2.30%. The 3-year beta score for the fund is 0.11. CBHCX 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 - Free Report) 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 5.1% in Change Healthcare, 4.2% in Alleghany and 3.5% in Activision Blizzard. Todd W. Munn has been the lead manager of AEDFX since Sep 30, 2010.
AEDFX’s 3-year and 5-year annualized returns are 4.2% and 3.2%, 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 0.16. AEDFX 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 5.1% in Vanguard S&P 500 ETF, 3.2% in Apple and 2.5% 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 2.4% and 2.8%, respectively. Its net expense ratio is 1.2% 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 >>