Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website

Chapter 7Alternative Equity Market Neutral Funds

Synopsis

Alternative Equity Market Neutral Funds are a collection of low-risk, low-return strategies. As a whole, these funds are the most stable of all Lipper alternative classifications. Investors lose interest in low-volatility strategies when the stock market is doing well, but for long-term investors with the right set of expectations, these funds live up to their name and can make a great portfolio diversifier.

Definition

Funds that employ portfolio strategies generating consistent returns in both up and down markets by selecting positions with a total net market exposure of zero.

Definition of the Lipper classification: Alternative Equity Market Neutral Funds

Alternative Equity Market Neutral Funds use diverse strategies that have low volatility and low correlation to equity markets. By definition, these funds try to neutralize beta. This strategy hedges market risks by going long and short equities in the same sector, industry, country, style, and market capitalization, aiming to offset gains and losses that are driven by top-down market exposure.

Due to these funds' diverse strategies, it is important for advisors to understand what they are functionally buying. The funds' factor exposures vary widely, and advisors must undertake bottom-up research or rely on third-party research for due diligence.

The returns of these funds have low volatility so investors have a lower potential for losses compared to other Lipper ...