An example of a market neutral hedged mutual fund is TFS Market Neutral mutual fund, managed by Kevin Gates in Pennsylvania, which is trying to deliver capital appreciation with 2,400 securities in its long portfolio and 1,275 in its short portfolio.
"Market neutral funds have had generally positive but lower returns than hoped for because their strategies are benchmarked to the risk free rate of return and the risk free rate of return is 1% right now," says Bregman.
A no-load fund, TFS Market Neutral mutual fund returned 6.23% in 2010, 16.64% in 2009 and 9.2% since inception, according to Morningstar. Its management fee is 2.25%.
"We have a constant short portfolio and a persistent hedge in place. The maximum position is 1% with our largest long position at 51 basis points and the largest exposure is 6% in consumer noncyclicals," says Gates. "The return stream we are trying to provide is separation between our long and our shorts. It's a full-time balanced approach."
TFS Market Neutral mutual fund, which is long 100% and short 70%, invests largely in small-cap companies using a quantitative bottom-up analysis.
Because Schwab's hedged equity mutual fund invests in large-cap stocks, it will diverge from the TFS Market Neutral mutual fund, according to Alpert.
"The TFS Market Neutral fund has stable performance over time, although it has had some down years too. It's more quantitatively driven than the Schwab hedged equity mutual fund," says Alpert. "TFS uses nine quantitative models and maintains a dollar long for 67 short. They stayed in the more smaller cap names where there's more opportunity."
TFS market neutral mutual fund remains deliberately diversified. "We are not picking any single stock or security position so they will not have any significant impact on the fund," says Gates.
According to Morningstar, the top four market neutral hedge mutual funds year to date are Vanguard Market Neutral I at 7.11%, Eaton Vance Parametric at 5.66%, Alliance Bernstein Market Neutral at 4.44% and American Century Equity Market Neutral at 4.15%.
Other market-neutral funds include Montgomery U.S. Market Neutral, Value Line Hedged Opportunity and Zweig Euclid Market Neutral.
"Not so many mutual funds are shorting at the same time that they own a long position in other stocks. The long-short captures that hedge strategy," says Tjornehoj. "Market neutral funds tend to strike a balance between long and short and maintain that throughout a market cycle. Instead of being overly long or short, they tend to keep a mix that is steady."