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Definition of ‘Market Neutral’

Market Neutral is a strategy undertaken by an investor or an investment manager that seeks to profit from increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on.

When we think of the major mutual fund complexes it is fair to say that while both large and incredibly successful, it would be difficult to imagine two firms more dissimilar than Vanguard and AQR. One firm is a “not for profit” purveyor of mostly low cost index funds and now ETF’s and the other the mutual fund equivalent of a high cost (by fund standards) hedge fund manager.

Vanguard’s front man, John Bogle, is the icon of index. His most recent quote is that “99% of trading is pointless” while AQR’s chairman Cliff Asness, ex managing director of Goldman Sachs, is revered as one of the great traders of his generation. So what do these diverse power house investment firms have in common?

They currently offer what we believe to be the premier Market Neutral strategies available to individual investors. Vanguard Market Neutral and AQR Equity Market Neutral both take a beta neutral approach to long short investing and provide Orion Portfolio Solutions Advisors with strategies designed perfectly for the third mandate of our MMS platform.

AQR states that “the portfolio is designed for absolute returns and to generate positive returns regardless of market cycle.” This is not uncommon language for this firm as many of their strategies are designed primarily for low correlation to traditional markets and may trade in exotic asset classes relying on the firm’s lauded capability to create alpha.

Vanguard’s material warns investors, “This fund has a unique and complex investment approach, compared with other Vanguard funds. Its goal is to “neutralize,” or limit, the effect of stock market movement on returns. Because of this, the fund’s return is often uncorrelated to that of the stock market. Unlike other Vanguard funds, this fund uses long- and short-selling strategies, which involve specific risks not apparent in traditional mutual funds. The fund may be appropriate for a small portion of an already well-diversified portfolio.”

Reading the above disclosure we are sure Mr. Bogle is not a huge fan, but we are. In fact Rocaton Advisors selected both strategies as Diversifiers during our search this past January. Neither single ticker strategy has disappointed. In a difficult year for both stocks and bonds the year to date returns on Vanguard Market Neutral is a solid 4.10% and AQR Equity Market Neutral is at 11.49%. As of their most recent reporting both strategies have a slightly higher number of longs than shorts, but both are adhering to their stated goal of profiting from stock selection rather than from general market movements.

The lesson here is that great strategies may be uncovered in surprising places. We believe that we are in an era of great Diversifier opportunity and that even though traditional stock and bond markets could be primed for a breather, strategies not relying on Market Movement are being prioritized by top tier investment firms of every kind.


The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Orion Portfolio Solutions does not guarantee any minimum level of investment performance or success of any index portfolio or investment strategy. Past performance is not indicative of future results. Information obtained from third party sources are believed to be reliable but not guaranteed. Orion Portfolio Solutions makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.