How Not To Make a Mutual Fund
Case in point: market-neutral funds.
No Pain, No Gain
Of all fund types, market-neutral* seems to be the least useful. To be sure, other fund categories are riskier or more gimmicky or more dangerous. Some are all three. For example, the many varieties of leveraged index exchange-traded funds, which not only lurch in price over the short term, but which are also long-term losers because of how their leverage is implemented. However, for brief periods of time, those funds can turn a nifty profit.
[* Market-neutral funds are those that attempt to eliminate their exposure to a market (typically a stock market) by having as much money in short holdings as in long holdings. The idea is that the long and short positions will hedge any market movements, leaving the fund with a net profit (or loss) from the non-market-related movements of its securities.]
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.