Market Neutral

Market neutral mutual funds and ETFs pursue a strategy of buying some... Market neutral mutual funds and ETFs pursue a strategy of buying some stocks (“going long”) and shorting other stocks (“going short”) with the goal of generating positive returns. These funds are known as market neutral because they don’t seek to bet on the direction of the overall stock market. Rather, they aim to create returns that are independent and uncorrelated to that of the market. One way they do this is by focusing on specific industries—betting on the stocks they deem to be the most undervalued, and betting against the stocks they deem to be the most overvalued. These funds can be a valuable addition to a portfolio because they can add meaningful diversification for investors. Unlike a typical equity fund, a market neutral fund can provide positive returns even when the market is negative. Adding these funds may also lower the overall volatility of a portfolio. They are not without risk, however. A market neutral fund that takes short positions is exposed to the possibility of short squeezes, where the price of a stock they’ve bet against rises significantly. This can cause serious losses, especially if the fund took a concentrated position. As a result, these funds are only appropriate for aggressive investors with a high risk tolerance. Last Updated: 12/27/2024 View more View less

Market neutral mutual funds and ETFs pursue a strategy of buying some stocks (“going long”) and shorting other stocks (“going short”) with the goal of generating positive returns. These funds are known as... Market neutral mutual funds and ETFs pursue a strategy of buying some stocks (“going long”) and shorting other stocks (“going short”) with the goal of generating positive returns. These funds are known as market neutral because they don’t seek to bet on the direction of the overall stock market. Rather, they aim to create returns that are independent and uncorrelated to that of the market. One way they do this is by focusing on specific industries—betting on the stocks they deem to be the most undervalued, and betting against the stocks they deem to be the most overvalued. These funds can be a valuable addition to a portfolio because they can add meaningful diversification for investors. Unlike a typical equity fund, a market neutral fund can provide positive returns even when the market is negative. Adding these funds may also lower the overall volatility of a portfolio. They are not without risk, however. A market neutral fund that takes short positions is exposed to the possibility of short squeezes, where the price of a stock they’ve bet against rises significantly. This can cause serious losses, especially if the fund took a concentrated position. As a result, these funds are only appropriate for aggressive investors with a high risk tolerance. Last Updated: 12/27/2024 View more View less