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What is a Market Neutral Fund?

A market neutral fund is a mutual fund whose goal is consistent returns in any market climate.

How Does a Market Neutral Fund Work?

A market neutral fund namely generally holds both short and long share positions in specific stocks and it holds stocks that the fund managers view optimistically as well as pessimistically. Gains on short sales are distributed as cash.

The fund's composition is meant to yield returns exceeding the yield Treasury bills (T-bill) regardless of whether the market is bullish or bearish.

Why Does a Market Neutral Fund Matter?

Market neutral funds feature frequent buying and selling by the fund managers. For this reason, market neutral funds are actively managed funds that charge higher-than-average management fees to holders. Evaluating the fund's manager is generally the best way to determine if the potential returns are higher than the fees you will be charged.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.