Inflation has been rising since December 2023, and the assurances of three rate cuts in 2024, made by the Fed in 2023, currently seem a fair distance away. The central bank, too, has been careful in the messages that it has been sending across, trying to maintain the balance between keeping the markets hopeful yet realistic.

Over the last four months, markets have been trying to gauge the timeline of the first rate cut, with various indicators showing that the central bank’s restrictive policies have had a sufficient effect on various sectors even as inflation remained warm.

The central bank’s projections still show at least three rate cuts in 2024 after the conclusion of their late April meeting. But while there was an overwhelming consensus prevalent earlier in the markets that the first of those cuts would be in June, still-high inflation witnessed last month prevented Fed officials from committing a timeline. They would like to go through more data to decisively conclude that the war against inflation has been won and the time is right to lower rates.

However, markets have taken solace from the fact that Fed Chair Jerome Powell has categorically said the next policy move would most likely be a rate cut rather than a rate hike to tackle inflation. This assures investors that the central bank is keen on bringing rates down currently as an approach, even as the lure to raise rates is moderately high.

This tussle between trying to balance the risk of the economy slowing down with an inflationary economy would keep the market volatile for the time being. In such an environment, prudent investors often opt for market-neutral funds. 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. They are extremely diversified.

In taking up a long position on a stock, one expects its price to increase over time so that it can be sold at a profit. 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 utilizing 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. The main objective is to reduce risk and not volatility, as market-neutral funds feed off 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) or 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 (CBHAX Quick QuoteCBHAX - Free Report) seeks to achieve its business objectives by implementing a market-neutral investment strategy designed to raise income from its investments while maintaining a low correlation to the foreign and domestic equity and bond markets.

Three top holdings for CBHAX are 0.5% each in Universal Corporation, SoftBank and Formosa Plastics. Scott R. Kefer has been the lead manager of CBHAX since October 2022.

CBHAX’s 3-year and 5-year annualized returns are 1.5% and 2.7%, respectively. Its net expense ratio is 0.75%. The 3-year beta score for the fund is 0.04. CBHAX 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.

Gateway Fund (GATEX Quick QuoteGATEX - Free Report) invests the majority of its net assets in a diversified portfolio of common stocks while also selling index call options and purchasing index put options.  

Three top holdings for GATEX are 7.3% in Apple, 7.2% in Microsoft and 3.6% in Amazon. Kenneth H. Toft has been the lead manager of GATEX since February 2013.

GATEX’s 3-year and 5-year annualized returns are 4.5% and 5.9%, respectively. Its net expense ratio is 0.94%. The 3-year beta score for the fund is 0.5. GATEX has a Zacks Mutual Fund Rank #2.

Calamos Market Neutral Income (CVSIX Quick QuoteCVSIX - Free Report) seeks high current income alongside stability of the principal investment amount by investing in equities and 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 4% in Microsoft, 3.7% in Apple and 2.4% in Paolo Alto. John P. Calamos has been the lead manager of CVSIX since September 1990.

CVSIX’s 3-year and 5-year annualized returns are 3.1% and 3.8%, respectively. Its net expense ratio is 1.20%. The 3-year beta score for the fund is 0.20. CVSIX has a Zacks Mutual Fund Rank #2.

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