Once the domain of the ultra high-net-worth and institutional investors, a growing number of retail investors are achieving similar levels of risk minimisation by tapping into the low or zero correlation strategies adopted by market-neutral funds.
Much of the success of market-neutral funds says Phillip Boustridge, fund manager with Pengana’s Australian Equities Market-Neutral Fund, can be attributed to turning the investment process on its head, relying predominantly on manager skill rather than market direction.
“This style of investing is similar to the investment approach of family offices that seek uncorrelated strategies to assist in protecting capital and require a reasonable rate of return given the risk of the portfolio,” advises Mr Boustridge.
Instead of taking a traditional portfolio construction approach – which fails to fully address risk and return exposures produced through traditional equity market investments – he says a market-neutral approach is all about minimising market risk and thereby lowering correlations to traditional asset classes including equities
“That’s because it focuses on stock specific opportunities and risks, using a stock-selection model based on fundamental factors that typically drive share prices, like earnings, cash flow and profit,” says Mr Boustridge.
