What are Market Neutral Funds?

Many investors planning for long-term goals like retirement have probably heeded the advice to diversify their portfolio and have some of their assets in mutual funds.

However, if they planned on retiring in 2008 or 2009, they may have to continue to work a little longer as those mutual funds have recently lost value. That is because mutual funds are investment opportunities comprised of portions of stocks and securities influenced by the ups and downs of the stock market.

Since the stock market is down from its peak, many mutual funds have been devalued significantly. However, not all mutual funds are feeling the pain as market neutral funds are still operating without problems.

No Stock Market Correlation

Like their traditional mutual fund siblings, market neutral funds are a collective investment scheme where the financial resources of many are pooled together and invested into a fund compromised of assets such as stocks, bonds, property and the like.

However, unlike their market-linked cousins, market neutral funds are not directly linked with the stock market. Because of the types of investments comprising market neutral funds and the lower risks involved, they are also more expensive instruments than traditional mutual funds.

Diversity

Commonly, market neutral funds offer a combination of long and short positions in various securities, such as long-short stock funds, bonds, currencies and other commodities. A professional mutual fund manager responsible for the financial health of the market neutral funds will first rate the potential components for the fund based on both technical and measurable data. Some of the ranking factors include the opinions of analytical experts plus value, momentum, liquidity and the sentiment of the potential fund components.

As with any other type of investment opportunity, it is up to you, the investor to be your best advocate and thoroughly research both the benefits and risks associated with market neutral funds.