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Market-Neutral: Funds For All Markets
Since the experts can’t seem to agree on which way the market is headed
next, many investors are probably eyeing market neutral mutual funds.
Market neutral funds are designed to generate positive returns regardless
of whether the market moves up or down.
However, achieving that goal is harder than it looks. In fact, excluding
bond funds, a category that has outperformed stocks in recent years, I
know of only one fund that recorded a positive return in 2008, the year
that the market tanked big time.
Best Fund
I won’t keep you in suspense; the fund is Midas Perpetual Portfolio
(MPERX). Midas hasn’t had a losing year for at least the last 10-years,
which is as far back as my records go. The downside is that when the
overall market is strong, Midas tends to underperform. For instance, last
year (2009), Midas returned 17% compared to 23%
for the S&P. Its worst showing in that respect was 2003, a year when the
S&P gained 29%, but the Midas fund was up only fractionally. Nevertheless,
looking at longer-term numbers brings the fable about the Tortoise and the
Hare to mind. Over the past five years, Midas’ average annual return is a
shade under 6% compared to a big fat zero for
the S&P 500.
Nothing Fancy
Midas doesn’t rely on fancy computer trading algorithms to produce
those results. In fact, Midas doesn’t do much trading at all. It simply
maintains fixed percentages of gold, silver, Swiss Francs, hard assets
(real estate and natural resources), large-capitalization growth stocks
(both U.S. and foreign), and dollar assets (corporate bonds) in its
portfolio.
The Midas Perpetual Portfolio fund is one of a kind. Most market-neutral
funds combine long and short strategies, which pertain primarily to
stocks.
Long/Short Strategies
If you’re not familiar with those terms, shorting is a strategy
that makes money when a shorted stock drops in price and loses if the
stock moves up instead. Short sellers borrow shares that they don’t own
from their broker, then sell those borrowed shares in hopes of buying them
back later at a lower price. The process is termed “selling short” because
it involves selling shares that you don’t own. “Long” is the term that
applies when you simply buy a stock, which is what most of us do.
Market neutral funds typically hold long positions in stocks that they
expect to move up and short stocks that they expect to drop. They might do
the same thing with market indexes such as the S&P 500, or with
exchange-traded-funds that track specific industries such as
semiconductors or healthcare stocks.
Best Long/Short Fund
Of the funds that I’ve tracked, the TFS Market Neutral Fund (TFSMX)
has done the best job of implementing a long/short strategy. It’s a
quantitative fund, meaning that instead of pouring over financial
statements, the fund relies on computerized formulas to pick small-cap
stocks to buy long or to sell short. TFS allocates 60% of its assets to
long positions and 40% to shorts.
TFS recorded a 7% loss in 2008, much less than
the S&P 500’s 37% drop. As of last week, it was at breakeven for the year
compared to a 5% loss for the S&P. TFS, which
started in 2005, has racked up an impressive 9%
average annual return since that time, compared to breakeven for the S&P.
Like the Midas fund, TFS underperformed the S&P last year (17% vs. 26%).
As we’ve all heard many times, past performance is no guarantee of future
results. An unexpected change in market conditions could trip up these
formerly safe strategies.
published 9/12/10 |
