Can Market Neutral Funds Avoid The Movements Of The Market?
Since some mutual funds are invested in the market, the funds can be negatively impacted if the prices in the stock market fall. Investors who put their hard-earned money into market funds want to know that there is a way that their money will be safe regardless of how the market is performing. Investors should know that market neutral funds are the answer to their problem. This type of fund will yield returns for investors regardless of how the market is doing. Market neutral funds, also known as long-short funds, do not act like stock mutual funds.
The theory behind these types of mutual funds is pretty straightforward and it is based on the idea of selling short and selling long. Essentially, managers of the fund will try to diversity their investments by purchasing stocks that they can eventually sell long because they will outperform the other stock speculations and they also seek out other types of stocks that they think will under perform the other available stocks and these they will sell short. Basically, this evades the rises and falls of the market because no matter what direction the market takes, the mutual fund is covered. It acts somewhat like a scale in that either one side of the portfolio is profiting or the other side is profiting, depending on how the market will act. In either case, investors are covered and are satisfied.
Although this seems like a very smart idea, the evidence about its success is not yet concrete. Different studies have provided different results and although some market neutral mutual funds have yielded tremendous returns, others have had consistent losses for years in a row. A disadvantage of this kind of fund is that it is more expensive than other funds and they are also not able to pay for the most experienced and capable managers who might be able to make better investment decisions. More time is needed for investors and analysts to determine whether or not this kind of investment is beneficial for the long-term.
Some types of market neutral funds have offered returns on investments that could yield double the amount that was invested but they also offer double the risk. These speculations lean much more heavily towards the side of risk than to being safe and investors should keep this in mind if they are considering putting their savings into it. Its results can’t be guaranteed and the funds are very unpredictable and volatile. Different people will make different decisions and each investor has to choose the venture that best suits his or her needs. Those who enjoy risk and want to see higher returns may choose to put some money into market neutral funds while those who are more conservative and careful will avoid them completely. Even though the concept behind the investment makes sense, there is still a lot more research that has to be done before it becomes a safe option.
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