Market-Neutral Alternative Funds

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Table of Contents

Advantages of Market-Neutral Alternative Funds
Disadvantages of Market-Neutral Alternative Funds
Quantitative Funds
Reference List

Advantages of Market-Neutral Alternative Funds

One of the vital advantages characteristic of market-neutral alternative funds is the lowest correlation rate compared to other assets. Even though the return pattern would change for the organization over time, it would still have the opportunity to mitigate risks by combining different strategies based on market-neutral alternative funds. Investment options are not being seen as the essential way of creating a fortune in this case because investors do not associate themselves with fortunes (Ayala and Blazsek, 2018). This is usually done to reduce the impact of the broader market on the organization and create a cushion for the company that would protect the lower levels of correlation from increasing drastically. Overall, market-neutral alternative funds are advantageous for correlation rates because they broaden the list of asset classes that are eligible for improvement.

A decreased level of volatility is another benefit typical of market-neutral alternative funds. Investment lineups of any organization should include a specific level of portfolio variation to support flexible strategies. In this case, risk mitigation is required to set up a proper correlation to alternative strategies that could offer a different outlook on average volatility. Market-neutral alternative funds are advantageous because the broader equity markets cannot compete with investors who pay closer attention to total volatility and fixed income indexes (Chen and Tindall, 2016). Therefore, even if the organization is going to experience an upsurge in market-neutral volatility, the market-neutral alternative funds are going to remain unchanged.

The ultimate advantage of such funds is that they might be beneficial even within an environment where interest rates are rising. Knowing that the US Federal Reserve is most likely to get exposed to an increase in the rates related to federal funds, it may be safe to say that market-neutral alternative funds could bring an increased level of neutral equity. Improved organizational strategies would help companies establish boosted returns and successfully act against short-term interest rates (Hartley, 2019). Sale proceeds would not rise, allowing the organization to conquer short-term interests and develop neutral equity strategies that increase incomes and minimize finance-related risks.

Disadvantages of Market-Neutral Alternative Funds

Nevertheless, when operating market-neutral alternative funds, one should consider the increasing complexity of investment procedures that would interfere with the processes of purchasing and vending stocks. Successful implementation of market-neutral alternative funds would require the organization to pick the right market position in advance and operate the right stocks when necessary. This requires excessive experience and foreseeing capabilities, which increases the speculative value of market-neutral alternative funds and decreases their operational efficiency (Chen and Tindall, 2016). On the other hand, the organization should be ready to invest an incredible amount of resources in market-neutral alternative funds in order to succeed. The increasing rate of asset trade and market turnover would turn the funds in question into one of the biggest corporate burdens.

Another problem that one should consider when working with market-neutral alternative funds is that the investment fees related to this type of funds are identical to mutual funds. These resources require the management to possess extensive expertise in the area of fund management. Fund managers have to put in their best efforts to achieve higher returns and attain nearly extreme administration fees at the same time. Without the knowledge regarding the right balance of investments, the manager would not be able to benefit from market-neutral alternative funds (Ayala and Blazsek, 2018). Overall, if stock prices are going up for a prolonged period, it will be most probable that investors suffer from severe market fluctuations and have no possibility to address the challenges related to how price changes are expected to alter market-neutral alternative funds.

Quantitative Funds

Advantages of Quantitative Funds

The debate on the success rate of quantitative funds has been up for some time due to the thought-provoking nature of this type of fund. The biggest advantage so far is that the majority of the organizations applying such funds possess the discipline and exercise it recurrently. With the right business finance model, quantitative funds become an essential asset for the company, especially when proper technology is in place to support management-run initiatives (Koijen et al., 2017). For the most part, quantitative funds stand for the assets that appeared as a result of overcoming inefficiencies and exploiting the benefits of information technology innovations. Different types of input created a situation where quantitative funds became the rationale for organizations to pay more attention to income growth and financial stability.

Another advantage that can be mentioned here is that quantitative funds help managers locate inefficiencies in the strategy and come up with the most appropriate solution based on the input data. The multitude of potential scenarios makes it harder for managers to keep track of all imaginable outcomes, which makes quantitative funds an irreplaceable asset for any organization. The latter may be expected to increase the company’s capability to perform several investments simultaneously and help analyze the data based on both expected outcomes and reckonable information (Tsujimura and Tsujimura, 2018). Organizations may utilize quantitative funds as a means of performing the screening process, depending on what kind of investments are involved. The actual trading process would require the management to sell low-graded assets and build upon the highly-rated ones.

Quantitative funds contribute to the development of both long- and short-term finance strategies. With the help of this organizational asset, risk control becomes easier, and employees get a chance to record a personal contribution to corporate success in the case where they develop a closer relationship with finance managers. The level of diversification that currently affects quantitative funds is outstanding. Business models are never compromised by this type of funds, which allows the management to lower the cost of operations and overcome the need for experienced portfolio managers (Otero-González, Durán Santomil, and Correia-Domingues, 2020). Nevertheless, it may be recommended to hire at least one traditional analyst to ensure that quantitative funds are invested properly, and there are no alternative solutions that have been ignored for the sake of inattentiveness or lack of team knowledge.

Disadvantages of Quantitative Funds

Nevertheless, many organizations perceive quantitative funds as a black box that could negatively affect their operations. One of the main reasons why this is true is the problematic reputation of this type of fund. The absence of a strong following makes many finance managers question the value of quantitative funds because failures associated with them turned out to be disasters for the organizations that operated them. Arguably, the most known quantitative fund was the Long-Term Capital Management asset established by Robert Merton and Myron Scholes (O’Rourke, 2016). Despite their professional experience and extensive knowledge base, they were not able to generate adequate returns with the help of quantitative funds. Even though there were opportunities to exploit fund inefficiencies, the two finance experts still failed due to the fluctuating market direction and challenges related to betting leverage.

Another huge disadvantage of quantitative funds is that no future events can be predicted accurately enough to ensure that the team is going to add every required aspect to its finance strategy. On the other hand, quantitative funds are prone to higher levels of volatility, which means that a struggling market would not let this type of funds protect the organization from a financial collapse. The flexible nature of the market requires organizations to respond to purchase and vend signals quickly, which is not always possible with quantitative funds that are also associated with taxable events and extreme commissions (Otero-González, Durán Santomil, and Correia-Domingues, 2020). Short-time strategies cannot be based on this type of funds either, making the organization prone to downturns and implosions that may be hard to overcome in the future.

Behavioral Finance

The first choice that organizations have to make when they are looking for an opportunity to neutralize challenges related to behavioral finance is to limit their possible investments. This would aid the organization in developing the easiest strategies that could establish the best environment for the employees and managers, where they both would be able to overcome the decision paralysis that is most common in organizations that generate too many choices. For instance, if there are employees looking for the best retirement savings option, the organization could provide them with two-three opportunities instead of giving them the full list of available choices (Ramiah, Xu, and Moosa, 2015). The increasing straightforwardness of portfolio management would make the companies much more cognizant of what is required by employees and what are the best options available in the market.

Another solution that could be utilized to decrease the number of challenges related to behavioral finance is to reward action from employees and avoid stagnation by any means. Given that the organization could have reduced the number of choice options, the management could go even further and help employees plan their careers efficiently. The lack of activity displayed by the staff could be the first step toward auto-enrollment options that would ensure that the organization had engaged every worker in the process (Costa, Carvalho, and Moreira, 2019). An excessive number of alternatives would be reduced to one or two most reasonable options. Not only could this be the shortest path toward organizational commitment, but it would also help the management evade information and choice overload as a whole. Higher participation rates would mean that the organization successfully implemented solutions to behavioral finance management.

Ultimately, employee engagement and additional automated options should become a norm for the organization if the management expects to neutralize behavioral finance within portfolios. The tendency of employee procrastination could be overcome with the help of one or two most viable options or a single-choice agenda that would force the only available strategy upon the staff. An incremental increase typical of auto-escalation could be a threatening contribution to the portfolio, meaning that every participant would have no control over their savings (Costa et al., 2017). As for the portfolio management process, behavioral finance is a great challenge because the impact may hardly be minimized. The lack of possible rewards makes it vital to foresee the potential success through the lens of portfolios and premeditated agenda.

Overall, the idea for the majority of organizations coping with the effects of behavioral finance should be to remain as proactive as possible and overcome the barriers with the help of active employee and stakeholder participation. As the organization would reduce the number of obstructions related to behavioral finance, it would lead to higher enrollment rates and attract more participants to the existing initiatives. The fact of overcoming the challenges mentioned above could be one of the biggest rewards available to both the management unit and employees.

Reference List

Ayala, A. and Blazsek, S. (2018) ‘Equity market neutral hedge funds and the stock market: an application of score-driven copula models’, Applied Economics, 50(37), pp. 4005-4023.

Chen, J. and Tindall, M. L. (2016) ‘Constructing equity market–neutral VIX portfolios with dynamic CAPM’, The Journal of Alternative Investments, 19(2), pp. 70-87.

Costa, D. F., Carvalho, F. D. M. and Moreira, B. C. D. M. (2019) ‘Behavioral economics and behavioral finance: a bibliometric analysis of the scientific fields’, Journal of Economic Surveys, 33(1), pp. 3-24.

Costa, D. F. et al. (2017) ‘Bibliometric analysis on the association between behavioral finance and decision making with cognitive biases such as overconfidence, anchoring effect and confirmation bias’, Scientometrics, 111(3), pp. 1775-1799.

Hartley, J. S. (2019) ‘Liquid alternative mutual funds versus hedge funds: returns, risk factors, and diversification’, The Journal of Alternative Investments, 22(1), pp. 37-56.

Koijen, R. S. et al. (2017) ‘Euro-area quantitative easing and portfolio rebalancing’, American Economic Review, 107(5), pp. 621-27.

O’Rourke, P. J. (2016) ‘The future of the economy: self-fulfilling prophecies’, The Independent Review, 20(3), pp. 417-423.

Otero-González, L., Durán Santomil, P. and Correia-Domingues, R. H. (2020) ‘Do investors obtain better results selecting mutual funds through quantitative ratings?’, Spanish Journal of Finance and Accounting, 49(3), pp. 265-291.

Ramiah, V., Xu, X. and Moosa, I. A. (2015) ‘Neoclassical finance, behavioral finance and noise traders: a review and assessment of the literature’, International Review of Financial Analysis, 41, pp. 89-100.

Tsujimura, K. and Tsujimura, M. (2018) ‘A flow of funds analysis of the US quantitative easing’, Economic Systems Research, 30(2), pp. 137-177.

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