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3 Market-Neutral Funds to Watch Amid High Volatility
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Volatility on Wall Street continues as investors await the Consumer Price Index data for the month of August to be released on Sep 13. Inflation is expected to remain elevated due to rising oil prices and a tight labor market.
Inflation continues to be above the Federal Reserve’s 2% long-term target so far. However, the Fed’s aggressive rate hike has resulted in a favorable falling trend in headline inflation. But rising oil prices and tight labor are expected to impact August CPI, leaving less room for the Federal Reserve to make a favorable interest rate decision for the markets, in its upcoming September meet.
According to the data released by the Bureau of Labor Statistics on Sep 1, 187,000 jobs were added for the month of August, while unemployment unexpectedly rose to 3.8%, the highest since February 2022. Employment in sectors like health care, leisure and hospitality, social assistance, and construction continued to trend up, whereas transportation and warehousing have witnessed a decline.
This suggests that the labor market is still tight, and the Fed expects further rebalancing in the labor market. While the market wants a pause from further rate hikes this year, Fed chairman Jerome Powell in his Jackson Hole speech stressed on the central bank’s intention to keep inflation under check and use additional monetary tightening measures, if required.
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 3 (Hold), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio compared to the category average.
Diamond Hill Long-Short I (DHLSX - Free Report) fund invests most of its net assets by investing in equity securities of domestic companies irrespective of their market capitalization, which its advisors believe are undervalued, and selling short equity securities of companies that are overvalued. DHLSX advisors evaluate a company's value independent of its current stock price.
Chris Bingaman has been the lead manager of DHLSX since Apr 30, 2007, and most of the fund’s exposure is in companies such as Meta Platform (3.8%), Alphabet (3.7%) and American International (3.5%) as of 3/31/2023.
DHLSX’s three-year and five-year annualized returns are 9.6% and 5.5%, respectively. DHLSX has a Zacks Mutual Fund Rank #3 and an annual expense ratio of 1.5%.
To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AB Select US Long/Short (ASILX - Free Report) fund invests most of its net assets in domestic and foreign equity securities, preferably in large and medium market-cap companies, and cash and cash equivalent. ASILX advisors prefer to take a short position in equity securities of U.S. companies.
Kurt A. Feuerman has been the lead manager of ASILX since Dec 11, 2012, and most of the fund’s exposure is in companies such as Berkshire Hathaway (4.7%), Apple (4.2%) and Alphabet (2.1%) as of 3/31/2023.
ASILX’s three-year and five-year annualized returns are 7.9% and 6.9%, respectively. ASILX has a Zacks Mutual Fund Rank #3 and an annual expense ratio of 1.6%.
Neuberger Berman Long Short (NLSAX - Free Report) fund invests most of its net assets by taking long and short positions in domestic and foreign common, preferred equity securities, exchange-traded funds, fixed-income securities and restricted securities. NLSAX advisors also invest in derivative contracts, futures, swaps, forwards or options of U.S. and non-U.S. companies to manage risks and returns.
Chris Bingaman has been the lead manager of NLSAX since Apr 30, 2007, and most of the fund’s exposure is in companies such as Microsoft (4.0%), Apple (2.9%) and Fanatics Holdings (2.6%) as of 4/30/2023.
NLSAX’s three-year and five-year annualized returns are 6.0% and 5.8%, respectively. NLSAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.7%.
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3 Market-Neutral Funds to Watch Amid High Volatility
Volatility on Wall Street continues as investors await the Consumer Price Index data for the month of August to be released on Sep 13. Inflation is expected to remain elevated due to rising oil prices and a tight labor market.
Inflation continues to be above the Federal Reserve’s 2% long-term target so far. However, the Fed’s aggressive rate hike has resulted in a favorable falling trend in headline inflation. But rising oil prices and tight labor are expected to impact August CPI, leaving less room for the Federal Reserve to make a favorable interest rate decision for the markets, in its upcoming September meet.
According to the data released by the Bureau of Labor Statistics on Sep 1, 187,000 jobs were added for the month of August, while unemployment unexpectedly rose to 3.8%, the highest since February 2022. Employment in sectors like health care, leisure and hospitality, social assistance, and construction continued to trend up, whereas transportation and warehousing have witnessed a decline.
This suggests that the labor market is still tight, and the Fed expects further rebalancing in the labor market. While the market wants a pause from further rate hikes this year, Fed chairman Jerome Powell in his Jackson Hole speech stressed on the central bank’s intention to keep inflation under check and use additional monetary tightening measures, if required.
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 3 (Hold), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio compared to the category average.
Diamond Hill Long-Short I (DHLSX - Free Report) fund invests most of its net assets by investing in equity securities of domestic companies irrespective of their market capitalization, which its advisors believe are undervalued, and selling short equity securities of companies that are overvalued. DHLSX advisors evaluate a company's value independent of its current stock price.
Chris Bingaman has been the lead manager of DHLSX since Apr 30, 2007, and most of the fund’s exposure is in companies such as Meta Platform (3.8%), Alphabet (3.7%) and American International (3.5%) as of 3/31/2023.
DHLSX’s three-year and five-year annualized returns are 9.6% and 5.5%, respectively. DHLSX has a Zacks Mutual Fund Rank #3 and an annual expense ratio of 1.5%.
To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AB Select US Long/Short (ASILX - Free Report) fund invests most of its net assets in domestic and foreign equity securities, preferably in large and medium market-cap companies, and cash and cash equivalent. ASILX advisors prefer to take a short position in equity securities of U.S. companies.
Kurt A. Feuerman has been the lead manager of ASILX since Dec 11, 2012, and most of the fund’s exposure is in companies such as Berkshire Hathaway (4.7%), Apple (4.2%) and Alphabet (2.1%) as of 3/31/2023.
ASILX’s three-year and five-year annualized returns are 7.9% and 6.9%, respectively. ASILX has a Zacks Mutual Fund Rank #3 and an annual expense ratio of 1.6%.
Neuberger Berman Long Short (NLSAX - Free Report) fund invests most of its net assets by taking long and short positions in domestic and foreign common, preferred equity securities, exchange-traded funds, fixed-income securities and restricted securities. NLSAX advisors also invest in derivative contracts, futures, swaps, forwards or options of U.S. and non-U.S. companies to manage risks and returns.
Chris Bingaman has been the lead manager of NLSAX since Apr 30, 2007, and most of the fund’s exposure is in companies such as Microsoft (4.0%), Apple (2.9%) and Fanatics Holdings (2.6%) as of 4/30/2023.
NLSAX’s three-year and five-year annualized returns are 6.0% and 5.8%, respectively. NLSAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.7%.
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 >>