Market Neutral Funds

MARKET NEUTRAL FUNDS: - They represent a relatively new group of funds whose objective is to match stock market returns without assuming the market's risk. They attempt to do this by (1) investing in stocks they think will outperform the market and (2) "short selling" (selling borrowed shares of stocks they think will decline in value). In a rising market, these funds can benefit from stock gains and might also earn a profit on some short sales. In a falling market, profits from short sales can offset declines in portfolio stock values."

Brilliant strategy, bound to lower risk and increase gain. Oh, really?

Fund	Inception Date	Inception to 3/17/99 Return
Barr Rosenberg Market Neutral	12/97	-6.1%
Barr Rosenberg Select	11/98	3.6
Boston Partners	12/98	-6.1
Dreyfus Premier	6/98	-13.0
Phoenix Euclid	5/98	-7.6
Puget Sound	6/98	-3.4

I also remember the "great" commentary regarding the use of Collateralized Mortgage Obligations (CMO's) offered by the largest financial firms in the 80's- and they lost millions. It was a can't lose proposition. And don't forget Long Term Capital and the "ability" of Nobel laureates to provide formulas for hedging that gave huge profits with almost nil risk. That one cost $3.6 billion. Notice the words- they THINK will outproduce the market- in the PR release. Literally every new and guaranteed way to beat the market has simply cost investors money. I would not touch Market Neutral funds for at least three years- maybe five. Everyone that has consistently tried to outproduce the market has effectively failed- or did it only for a relatively short period of time. CAVEAT EMPTOR

MARKET NEUTRAL TRADING STRATEGIES:  (1999) (Individual Investor): This is an attempt to go both long and short and the same time and making a little cash at the same time and has been touted as diversification at its best- or extreme. What the analysts does is buy stocks that he thinks will go up and goes short (sells) stocks he thinks will fall. With the money form the "sale", he invests in Treasury bills and picks up some extra cash. So should you take a plunge in this "can't lose" strategy.? Well, does Long Term Capital strike a cord? Every time I have heard of the new thing on the block that will beat everything else (CMO's for example, Option Income Funds), I decide to wait awhile- maybe a year or two to see what happens. Next, the costs may exceed 2% annually- and the Vanguard S&P is under .25%. They definitely need more money to analyze both longs and shorts but you better make a piece of change to support the extra fees. And they tend to trade a lot due to the different exposures. Well, there goes your tax benefits.

But the bottom line is- do they work? The Barr Rosenberg fund was down 0.7% in mid December. The Euclid Market Neutral fund was down 4.5% in the first six months of operation.

They have been touted by Bill Sharpe, President of the IBCFP and others as the "investment du jour". Use at your own risk. I'll pass.