The wild stock market has even hurt mutual funds that are designed to weather such storms.

Share story

NEW YORK — Mutual funds that use short selling and other hedging tactics are billed as attractive ways for retail investors to access the sophisticated market-beating approaches available to institutional and wealthy investors.

How well have these specialized funds fared in the market turmoil?

The results are mixed. While these funds have done better than the market, they perhaps haven’t performed as well as they should.

There are two main types of stock mutual funds that use shorting strategies: “market neutral” and “long-short” funds that take a so-called 130/30 approach.

Figures from research firm Lipper show that market-neutral funds were down 7.1 percent this year as of Oct. 23, while long-short funds tumbled 32.3 percent.

While that compares favorably to a roughly 37 percent decline for the Standard & Poor’s 500 index, it’s also true these funds haven’t lived up to full potential.

“You can play the relative-performance game all you want,” said Harry Milling, mutual-fund analyst at investment researcher Morningstar. “Have they proven that they hold up better (than other stock funds)? Yes. But these funds aren’t really fulfilling their mandate.”

Market-neutral funds, as their name suggests, are supposed to perform independently of the market. They go long on some stocks, while shorting, or betting against, others. Returns should be steady, if unspectacular — in the single digits regardless of conditions. As the Lipper figures show, that hasn’t happened.

One market-neutral manager says the funds are hurting from the market’s swift and sudden dislocation.

“We’ve been affected less by the market and more by liquidations from hedge funds deleveraging,” said Larry Eiben, chief operating officer of TFS Capital, which manages TFS Market Neutral fund.

“When people stop looking at value and are still just liquidating, the prices tend to get out of whack,” he said.

Despite not living up to their stated goal, market-neutral funds are doing better than all but one stock category: dedicated short bias funds — which are exclusively short-selling strategies — are up 64 percent on average, Lipper reported.

Diversified U.S. stock funds, meanwhile, had lost 37.5 percent on average as of Oct. 23.

Funds that use 130/30, or sometimes 120/20, strategies see returns that are tied more closely to the market because they have fewer short positions — 30 or 20 percent of their portfolios.

“We’re meant to enhance (market-beating returns),” said Lee Spelman, client portfolio manager for 130/30 strategies at JPMorgan Funds, the industry leader in 130/30s. It has the largest offering, U.S. Large Cap Core Plus Select Fund.

Spelman said the fund’s strategy is to beat the U.S. market by 3 percentage points. As of Oct. 23, U.S. Large Cap Core Plus Select’s Class A shares had lost 35.4 percent, or 2.7 points better than the S&P 500.

Lipper includes 130/30s in its long-short category, a stable of uniquely structured funds that can have higher ratios of short positions and won’t perform in lock-step with the overall market.

Milling, the Morningstar analyst, still has doubts. He points out that these long-short funds are among the more expensive fund industry offerings, averaging more than 1.25 percent in annual fees.

“If you’re paying the extra fee for these funds to make sure part of your portfolio isn’t hemorrhaging, then they’ve failed,” he said.