Market-Neutral Funds Dine Out In Bear Market

by Carla Johnson, Investors Offshore, London

15 August 2002

Data compiled by Standard & Poor's shows that 'market-neutral' funds have averaged returns of 28.5% so far this year, compared to an average negative return of 12% for regular equity funds.

'Market-neutral' funds are not hedge funds - they are conventional mutual funds which take advantage of a ruling by the SEC in 1997, which allowed some funds to use short-selling techniques under tightly controlled conditions. Such funds use long-term stock holdings and short selling to try to cancel out the effects of volatility in stock markets.

Analysts say that these funds can only win during a savage bear market, and indeed the Axa Rosenberg Value Market neutral fund, which has returned 30.6% for the year to date, has only gained 4.7% annually since inception.

According to S & P, the five top mutual funds that have profited from short-selling strategies are: AXA Rosenberg Value Market Neutral; James Advantage Market Neutral fund; Phoneix-Euclid Market Neutral; Potomac US Short Investor and Prudent Bear fund.

But Phil Edwards, S&P's managing director of global fund research warns: "Any type of fund that employs short strategies is considerably riskier than the more traditional long only strategy."

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