Strong May Performance Propels Interest in Market-Neutral Funds
In a month where global market activity has been undoubtedly turbulent, there has been a bright spot that may shift the focus of many investors. According to Hedge Fund Research’s month-to-date data, the HFRX Equity Market Neutral Index is the only index with positive performance in May. As of May 28, performance was at 1.61 percent, compared with the Global Hedge Fund Index at -3.00 percent, the Equity Hedge Index at
-4.37 percent, and the Macro Index at -0.81 percent.
Since April 1, 2010, the BHA research team has spoken to 81 investors that are actively researching and allocating to market-neutral funds. Those 81 investors account for more than 20 percent of the total number of firms that the research team identified during the past two months.
Although these numbers are not overwhelming, we expect to see more investors change their focus to equity market-neutral funds. The recent market dip during the past few weeks is causing investors to reevaluate their current investment preferences. But for some, investing in market-neutral funds is unfamiliar territory. According to a fund manager running a large market-neutral fund, this type of investment should be a part of every portfolio; market-neutral funds allow for stable, low-risk returns regardless of the current market activity.1
An analyst at a large wealth advisor based in Geneva told BHA analysts that his firm has plans to allocate upwards of $20 million to at least three market-neutral funds by year’s end. The firm is more interested in equity market-neutral funds than it was last quarter, due in large part to the recent activity in the market. It is most interested in funds offering a UCITS III structure, which when combined with its interest in market-neutral funds, will ensure the firm is lessening its risk.
A small family office based in Florida is also predominately interested in equity market-neutral funds; it has plans to invest $2 million to $5 million during the next few months. The firm is evaluating this strategy simply because of the ratio of positions. In the past, the firm has found that many funds that claimed they were long/short held too many long positions, which is exactly what the firm does not want. Market-neutral funds allow it to feel more comfortable toward future commitments.
While market-neutral funds have the potential to provide diversified returns and improve portfolio performance, individual fund performance is largely the result of the fund’s design and construction, and the portfolio manager’s skill. This means that it is critical for investors to analyze past performance. Noting that caveat, investors are still actively researching equity market-neutral funds in order to truly find the best places to put their money.
1 The Wall Street Journal, “Sometimes It Pays to Be ‘Neutral’,” May 26, 2010.