Over the past several weeks we’ve been discussing my favorite mutual funds. These funds were selected based on an in-depth, in-house analysis; last week I shared my favorite picks in currency and equity long-short funds.
Continuing on with my mutual fund picks, this week we’ll discuss my fund picks in Market Neutral, Real Estate and Commodities.
Before we proceed, let’s discuss the difference between market neutral and long-short. A long-short fund can go to either extreme. With market neutral, the idea is to hold enough short positions to offset the risk of the long positions, in essence creating a “market neutral” effect. The S&P 500 has a standard deviation of 15 to 20 compared to 4.5 to 5.5 in the market neutral category. The long-short category is riskier than market neutral with an average standard deviation of 10 to 12.
My favorites here are Arbitrage I (ARBNX) and Merger (MERFX). Both funds have done well relative to their peers and their risk-return profiles have been good. Both are managed by a team and have lower-than-average expense ratios. Merger (MERFX) is mostly concentrated in the Americas while Arbitrage (ARBNX) has over 10% invested in Asia. Overall, I prefer Arbitrage I. Arbitrage did especially well after the tech bubble burst and only lost 0.55% in 2008. Management has been in place for the past 5.5 years.