Market neutral mutual funds and ETFs returned an average of -0.06% in December and -0.10% for the entire year of 2015. The combined category's annualized three-year returns stood at +1.01% through December 31, with 4.16% annualized volatility ("standard deviation") and a 0.09 Sharpe ratio. The funds, which are designed to move irrespective of the broad stock and bond markets, have done their job in terms of their three-year beta relative to the Barclays U.S. Aggregate Bond Index, which stood at 0.04, and generated 0.98% alpha over that time.
Best Performers in December
The three best-performing market neutral mutual funds in December were:
- QuantShares US Market Neutral Anti-Beta Fund (NYSEARCA:BTAL)
- PSI All Asset Fund (MUTF:FXMAX)
- IQ Merger Arbitrage ETF (NYSEARCA:MNA)
BTAL, which initially launched in September 2011, returned +3.35% in December, making it the top-performing '40 Act market-neutral fund for the month. For the year, however, BTAL gained just 0.15%, and for the three-year period ending December 31, its annualized returns stood at -2.10%. Its three-year beta of 1.04 means it had a high correlation to the Barclays U.S. Aggregate Bond Index. However, its -2.75% alpha was put you behind the index, and its above-average volatility (8.63% three-year standard deviation) resulted in a -0.15 three-year Sharpe ratio.
FXMAX ranked second among market neutral funds in December, with monthly gains of 2.93%. But over the one- and three-year periods ending December 31, the fund's returns were unattractive at -7.72% and -4.42% (annualized), respectively. Its three-year beta (0.46) and standard deviation (5.41%) were better than BTAL's, but its three-year alpha (-5.07%) and Sharpe ratio (-0.82) were worse.
Finally, the popular MNA ETF ranked third in December, with returns of +2.41%. In 2015, the ETF gained 1.45%, easily beating its peers. Its three-year annualized returns of +4.36% were comprised entirely of alpha (4.62%) relative to the Barclays U.S. Aggregate Bond Index, since the fund did its job by producing a three-year beta of 0.00 on the nose. MNA's three-year standard deviation of 3.65% was by far the lowest of any fund reviewed this month, and its three-year Sharpe ratio of 1.27 towered above the competition.
Worst Performers in December
The three worst-performing market neutral mutual funds in December were:
- TFS Market Neutral Fund (MUTF:TFSMX)
- QuantShares US Market Neutral Size Fund (NYSEARCA:SIZ)
- QuantShares US Market Neutral Momentum Fund (NYSEARCA:MOM)
TFSMX was December's worst performer among market neutral mutual funds and ETFs, returning -3.78% and dropping its returns for the full year into negative territory at -2.96%. The fund launched in 2004 and returned an annualized 0.83% for the three years ending December 31, with a fair 0.24 beta, 0.55% alpha, and 4.96% volatility. Its three-year Sharpe ratio stood at 0.18 as of year's end.
QuantShares' SIZ and MOM both ranked in the bottom three, somewhat offsetting the firm's first-place finish with BTAL. But while SIZ and MOM posted respectively disappointing one-month returns of -2.95% and -2.50% in December, MOM's annual gains of 17.42% in 2015 made it the clear standout of the six funds reviewed this month.
Indeed, MOM's three-year annualized returns of 4.19% were only slightly bested by the more-famed MNA, but on the negative side, its 1.14 three-year beta may be less than appealing to investors looking to diversify away from fixed income. By this basis SIZ, which returned an annualized -5.07% for the three years ending December 31, looked better with its 0.13 three-year beta. SIZ and MOM had respective three-year alphas of -5.26% and +2.46%, with respecitve volatility of 6.25% and 8.45%, resulting in Sharpe ratios of -0.81 for SIZ and 0.48 for MOM.
Past performance does not necessarily predict future results.
Jason Seagraves and Meili Zeng contributed to this article.