What is a Market Neutral Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 February 2020
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A market neutral fund is a type of mutual fund that is structured to aggressively pursue returns by creating a balance between bearish stock picks and bullish options. In many cases, a market neutral mutual fund will also seek to generate some revenue from the interest earned on the sale of different types of short securities. For a benchmark, it is not unusual for mutual funds of this nature to set a goal of returns that are up to six percent above the return on treasury bills or similar securities.

The exact blend of investments that are traded by a market neutral fund will vary, depending on the current state of the markets and the economy in general. Creating the ideal blend of bullish and bearish stocks as a means of neutralizing volatility in the marketplace can be difficult to achieve. Maintaining that balance tends to require careful supervision and accurate interpretation of what factors are at work in the marketplace. As a result, managing this type of fund can involve using alternative investments to replace others that are severely impacted by market situations.


Effective management of a market neutral fund also requires managers to rapidly implement purchases and sales of assets to maintain the desired equilibrium within the fund. At times, this may mean executing transactions on a daily basis, if the marketplace is undergoing a period of intense fluctuation. In addition, there is the need to anticipate market movements before they begin to affect the performance of any of the securities held by the fund. To be successful, managing this type of fund requires a great deal of time, and a great deal of expertise.

The complexity of the market neutral fund makes it a less than desirable investment option for investors that are new to the marketplace, or investors who tend to focus more on opportunities that carry a low amount of risk. In addition, funds of this type tend to have higher fees connected with the transactions. Since the turnover rate on the underlying investments is fairly frequent, the impact of the fees on the relative return achieved by the investor can be seriously impacted. For investors who understand the market well and enjoy the fast pace required, a market neutral fund can be an excellent investing option that provides an eclectic mix of securities with long positions, short positions, and a rate of return that can be very attractive, assuming that the fund’s projections of market movements proves to be accurate.



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