Do Long–Short and Market Neutral Mutual Funds Sail on an Even Keel?

Abstract

Long–short and market neutral funds seek superior risk-adjusted returns while limiting their exposure to stock market risk. Over the 1999 to 2013 period, the number of funds with these investment objectives increased by more than 700%. Despite their growing popularity, the authors find that long–short and market neutral funds deliver lower risk-adjusted returns than U.S. Treasuries. Their investigation also reveals that the returns of both types of funds are positively and significantly correlated with the stock market. However, both fund types perform better in down markets. Finally, the authors report that market neutral funds outperform long–short funds.