Market neutral funds aim to deliver above market rates of return with lower risk by hedging bullish stock picks (buys) with an equivalent number of short bets (sells). On top of investing, some income is also generated from the interest earned by placing the cash proceeds of the short sales in savings accounts.
The goal is to deliver consistent returns, ranging anywhere from 3% to 6% above Treasury bills or gilts, after fees, whether the market is going up or down.
However, not all market neutral funds are lower risk. The so-called double alpha or “double whammy” approach, which leverages the portfolio using futures and options, targets twice the returns – at twice the risk.