3 Market-Neutral Funds for Risk Reduction Amid Volatility
While inflation has been ebbing gradually over the past few months, it did rise significantly in August due to hot energy prices. Resultantly, even as the central bank did not raise interest rates in its September meeting, there were signals that there might be another hike before the year ends. Important Fed officials, and no less than Fed chair Jerome Powell, have gone on record saying that they are not happy with the current level of inflation as it continues to stay above the Fed’s target rate of 2%. As a result, the market will stay volatile for a while, with investors remaining apprehensive that the Fed will not be able to attain a soft landing of the economy.
In volatile markets, 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 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 CBHAX are 0.6% in Quanta Computer, 0.5% in Softbank and 0.5% in BB Seguridade. Scott R. Kefer has been the lead manager of CBHAX since Oct 30, 2022.
CBHAX’s 3-year and 5-year annualized returns are 1.9% and 2.4%, respectively. Its net expense ratio is 0.75% compared to the category average of 2.30%. The 3-year beta score for the fund is 0.08. 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.
BlackRock Event Driven Equity BALPX invests the majority of its net assets in equity securities and related derivatives by employing an event-driven approach. BALPX advisors focus on companies that have announced a material change or ones that the advisors believe will undergo a material change.
Three top holdings for BALPX are 3.3% in DCP Midstream, 2.8% in iShares iBoxx and 2.4% in Howmet Aerospace. Mark McKenna has been the lead manager of BALPX since May 5, 2015.
BALPX’s 3-year and 5-year annualized returns are 2.3% and 3.7%, respectively. Its net expense ratio is 1.37% compared to the category average of 1.90%. The 3-year beta score for the fund is 0.11. BALPX has a Zacks Mutual Fund Rank #2.
Calamos Market Neutral Income CVSIX 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 3.5% in Apple, 3.3% in Microsoft and 2.6% in Paolo Alto. John P. Calamos has been the lead manager of CVSIX since Sep 3, 1990.
CVSIX’s 3-year and 5-year annualized returns are 2.9% and 3.2%, respectively. Its net expense ratio is 1.22% compared to the category average of 1.79%. The 3-year beta score for the fund is 0.21. CVSIX has a Zacks Mutual Fund Rank #1.
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