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Has the market bottomed, or is it about to drop further? By now, it should be pretty obvious that nobody really knows.
That doesn't mean you should put your money under the mattress. Just don't take sides.
Consider the breed of mutual funds intended to be "market neutral." They're designed to generate positive returns whether the overall market moves down or up. I call them win-win funds because, in theory, you win no matter which way the market moves.
I know that may sound a little pie in the sky. And in fact, many so-called market-neutral funds have produced unimpressive results. However, I've found four worth considering.
First off, what's a market-neutral fund? Most stock-focused funds make money when the market -- or the part of the market they focus on -- goes up. Then there are bear-market funds, which mostly short the market and record gains when the major averages or certain sectors go down.
Most market-neutral funds follow a long/short strategy. They hold long positions in stocks that they view as having strong appreciation potential, and they short weak stocks. (In shorting, you borrow shares from your broker and sell them at today's prices because you expect the price to fall. If the share price falls, you replace the borrowed shares at a lower price and pocket the difference as profit.)
For instance, a fund might be long stocks that it views as underpriced and short overpriced stocks. Some funds may be long or short major indexes as a way to hedge their bets on individual stock positions.
Finding win-win funds
MSN Money hasn't yet added a market-neutral fund category to its fund screeners, so you can't search for them directly. However, the site does provide a "long-short" category in its "Top-Performing Funds" section. By using that feature as well as simply searching for market-neutral, long-short and bear-market funds on MSN Money, Morningstar and on the Web in general, I've assembled a list of fund candidates.My original list included more than 30 such funds. I culled that list by applying these criteria:
- No-load funds only. Loads are fees a fund uses to compensate the stockbroker or financial adviser who recommended the fund to you. Because we're picking our own funds, there is no need to pay that fee.
- Minimum initial purchase of $10,000 or less. Because it costs about as much to service a small account as it does a big customer, some funds avoid dealing with small investors by requiring big initial purchases. I ruled out funds requiring more than a $10,000 initial purchase.
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- Open to new investors. Some managers believe there's a limit to how much they can invest before they run out of good ideas, and they stop opening new accounts when they reach that limit. Because you can't invest in closed funds, there's no point in listing them here.
- Operating at least three years. Evaluating funds requires analyzing their historical performance. Obviously, you can't do that if the fund hasn't been around long enough to develop a sufficient history. I required at least three years of operating history because that is what Morningstar uses to develop its fund ratings.
11 market-neutral candidates
I ended up with a list of 11 market-neutral-fund candidates:- 1st Source Monogram Long/Short (FMLSX). Managers rely on fundamental analysis to pick stocks to hold long (undervalued) or short (overvalued). It holds mostly midcap and large-cap stocks.
- Alpha Hedged Strategies (ALPHX). Alpha is somewhere between a conventional fund and a fund of hedge funds. It employs 20 or so hedge-fund managers who act as subadvisers and select individual portfolios. The fund's portfolio is a combination of the individual managers' portfolios. Thus it employs a variety of hedge-fund strategies, depending on the whims of the managers.
- Georgetowne Long/Short (GTWNX). Managers employ fundamental analysis to identify long and short candidates. It holds mostly small caps.
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3 great funds on sale nowMSN Money columnist Tim Middleton recommends newly reopened, out-of-favor funds that he thinks should be part of anyone's portfolio.
- Hussman Strategic Growth (HSGFX). The manager looks at valuation and momentum factors such as earnings surprises and forecast growth to pick individual stocks for long positions, and hedges by taking short or long positions in index options.
- Icon Long/Short (IOLIX). It uses a quantitative-value-based formula to select mostly large-cap stocks traded on U.S. exchanges for long and short positions.
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