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3 Market-Neutral Funds to Mitigate Risks in Volatile Markets
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With inflation persisting and the economy showing resilience, investors are preparing for the possibility of enduring high interest rates. They eagerly anticipate the release of the September Personal Consumption Expenditures (PCE) Price Index, which is considered a measure of inflation by the Federal Reserve. Adding to the uncertainty, the benchmark 10-year U.S. Treasury yield has crossed the 5% mark, reaching a level not seen since July 2007. Although inflation has slightly decreased, it remains significantly high, raising concerns about a downturn. Concurrently, escalating tensions in Gaza have prompted investors to shift from stocks to bonds as a haven amid the uncertain times.
In volatile market conditions, market-neutral funds are the best options for investment. These funds focus on maintaining balance by managing both short positions or utilizing derivatives. A long position predicts that a stock’s price will increase over time and enable sales whereas a short position bets on a stock’s price decline and allows for repurchasing at a cost. What sets this approach apart is its ability to hedge against underperforming stocks through positions while capitalizing on performance, with long positions.
This balance is especially suitable, for the period of increased market fluctuations. Furthermore off-market funds generally aim for "zero beta,” indicating that their performance has a correlation with market trends.
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.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AQR Diversified Arbitrage (ADANX - Free Report) aspires to outperform the ICE BofAML US 3-Month Treasury Bill Index after fees while limiting its tracking risk compared to this benchmark. ADANX invests in a diverse portfolio of products such as stocks, convertible securities, debt securities, loans, warrants and derivative instruments.
John Eckert has been the lead manager of ADANX since Apr 30, 2002. Most of the fund’s holdings were in companies like Carnival Corp (1.6%), Horizon Therapeutics Public Ltd Co (1.4%) and Wayfair Inc. (1.2%) as of Jun 30, 2023.
ADANX’s 3-year and 5-year annualized returns are 5.9% and 6.9%, respectively. Its net expense ratio is 1.45% compared to the category average of 1.79%. The 3-year beta score for the fund is 0.16. ADANX has a Zacks Mutual Fund Rank #1.
Touchstone Ares Credit Opportunities (TMAYX - Free Report) seeks capital appreciation by investing most of its net assets, along with borrowings, if any, in a wide variety of debt securities or other debt instruments. TMAYX invests in U.S. and foreign debt instruments.
Chris Mathewson has been the lead manager of TMAYX since Sep 18, 2019. Most of the fund’s holdings were in companies like Blue Racer Midstream (1%), Korn Ferry (0.9%) and IttHldgsLlc (0.8%) as of Jun 30, 2023.
TMAYX’s 3-year and 5-year annualized returns are 4.7% and 4.9%, respectively. Its net expense ratio is 0.88% compared to the category average of 0.95%.The 3-year beta score for the fund is 0.70.TMAYX has a Zacks Mutual Fund Rank #1.
Gabelli ABC Fund (GABCX - Free Report) invests in domestic and foreign securities that the advisors believe provide attractive opportunities for appreciation or investment income. GABCX advisors also invest in undervalued common stocks, and low-risk U.S. Treasury Bills to mitigate the excessive capital loss.
Mario J. Gabelli has been the lead manager of GABCX since May 13, 1993. Most of the fund’s holdings were in companies like Lennar Corp. (1%), Aerojet Rocketdyne (2.6%) and PNM Resources, Inc. (1.4%) as of Jun 30, 2023.
GABCX’s 3-year and 5-year annualized returns are 2.9% and 2.5%, respectively. Its net expense ratio is 0.84% compared to the category average of 1.90%.The 3-year beta score for the fund is 0.15. GABCX has a Zacks Mutual Fund Rank #1.
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3 Market-Neutral Funds to Mitigate Risks in Volatile Markets
With inflation persisting and the economy showing resilience, investors are preparing for the possibility of enduring high interest rates. They eagerly anticipate the release of the September Personal Consumption Expenditures (PCE) Price Index, which is considered a measure of inflation by the Federal Reserve. Adding to the uncertainty, the benchmark 10-year U.S. Treasury yield has crossed the 5% mark, reaching a level not seen since July 2007. Although inflation has slightly decreased, it remains significantly high, raising concerns about a downturn. Concurrently, escalating tensions in Gaza have prompted investors to shift from stocks to bonds as a haven amid the uncertain times.
In volatile market conditions, market-neutral funds are the best options for investment. These funds focus on maintaining balance by managing both short positions or utilizing derivatives. A long position predicts that a stock’s price will increase over time and enable sales whereas a short position bets on a stock’s price decline and allows for repurchasing at a cost. What sets this approach apart is its ability to hedge against underperforming stocks through positions while capitalizing on performance, with long positions.
This balance is especially suitable, for the period of increased market fluctuations. Furthermore off-market funds generally aim for "zero beta,” indicating that their performance has a correlation with market trends.
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) or 2 (Buy), have positive three-year and five-year annualized returns and a low three-year beta, and carry a low expense ratio.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AQR Diversified Arbitrage (ADANX - Free Report) aspires to outperform the ICE BofAML US 3-Month Treasury Bill Index after fees while limiting its tracking risk compared to this benchmark. ADANX invests in a diverse portfolio of products such as stocks, convertible securities, debt securities, loans, warrants and derivative instruments.
John Eckert has been the lead manager of ADANX since Apr 30, 2002. Most of the fund’s holdings were in companies like Carnival Corp (1.6%), Horizon Therapeutics Public Ltd Co (1.4%) and Wayfair Inc. (1.2%) as of Jun 30, 2023.
ADANX’s 3-year and 5-year annualized returns are 5.9% and 6.9%, respectively. Its net expense ratio is 1.45% compared to the category average of 1.79%. The 3-year beta score for the fund is 0.16. ADANX has a Zacks Mutual Fund Rank #1.
Touchstone Ares Credit Opportunities (TMAYX - Free Report) seeks capital appreciation by investing most of its net assets, along with borrowings, if any, in a wide variety of debt securities or other debt instruments. TMAYX invests in U.S. and foreign debt instruments.
Chris Mathewson has been the lead manager of TMAYX since Sep 18, 2019. Most of the fund’s holdings were in companies like Blue Racer Midstream (1%), Korn Ferry (0.9%) and IttHldgsLlc (0.8%) as of Jun 30, 2023.
TMAYX’s 3-year and 5-year annualized returns are 4.7% and 4.9%, respectively. Its net expense ratio is 0.88% compared to the category average of 0.95%.The 3-year beta score for the fund is 0.70.TMAYX has a Zacks Mutual Fund Rank #1.
Gabelli ABC Fund (GABCX - Free Report) invests in domestic and foreign securities that the advisors believe provide attractive opportunities for appreciation or investment income. GABCX advisors also invest in undervalued common stocks, and low-risk U.S. Treasury Bills to mitigate the excessive capital loss.
Mario J. Gabelli has been the lead manager of GABCX since May 13, 1993. Most of the fund’s holdings were in companies like Lennar Corp. (1%), Aerojet Rocketdyne (2.6%) and PNM Resources, Inc. (1.4%) as of Jun 30, 2023.
GABCX’s 3-year and 5-year annualized returns are 2.9% and 2.5%, respectively. Its net expense ratio is 0.84% compared to the category average of 1.90%.The 3-year beta score for the fund is 0.15. GABCX has a Zacks Mutual Fund Rank #1.
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 >>