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"Market Neutral" Funds Are Not Risk Free and Require Scrutiny
Sounds great. A fund that does well in Bull Markets and Bear Markets. Market Neutral Funds will return 4OO to 700 basis points (4% to 7%) better than Long Term Treasuries, in a down market, and more in an up market.
Why isn't everyone rushing to buy one? Several reasons. First, a Market Neutral Fund really is comprised of 2 funds, run independently. One fund goes long, betting on stocks that will rise in price; the other goes short, betting on stocks that will fall in price. Those picks better be right and well timed!
Moreover, in addition to this market risk, there are two other conditions that a fund manager must be able to predict. These are sector risk and interest rate risk.
Likewise, investors need to be able to distinquish between managers who truly are market neutral and those claiming to be but who are not. In down markets, investors will lose any protection that they thought they would receive.
Some other concerns. Watch for a significant short term capital gains tax. And expect to pay twice what you normally should pay in fund expenses - these funds charge between 2% to 3%.
Source: Wall Street Journal, May 13, 1998
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