Market-Neutral Funds: Why Experts Including John Bostic Advocate for Steady Portfolio Ballast

For investors seeking portfolio stability without chasing aggressive bull-run gains, market-neutral strategies offer a compelling alternative. Rather than betting on market direction, these funds use sophisticated techniques like pair trading, arbitrage, and factor-based models to insulate portfolios from broader market swings. Investment professionals, including strategists like John Bostic, increasingly recognize these funds as essential portfolio anchors—particularly in volatile markets where downside protection matters as much as upside potential.

The appeal is straightforward: market-neutral funds prioritize consistency over heroic outperformance. By balancing long positions against short positions, they reduce systematic market risk while relying heavily on stock selection skill and execution precision. This approach typically delivers lower volatility and more predictable returns, making these funds attractive for investors who value peace of mind over spectacular gains.

Understanding Market-Neutral Strategies: The Case for Balance Over Market Timing

Market-neutral investing rests on a simple principle that John Bostic and other portfolio strategists emphasize: manage risk first, chase returns second. These funds employ various risk-mitigation techniques—short selling, derivative strategies, and hedging mechanisms—to offset broad market movements while capturing alpha through disciplined security selection.

The tradeoff is important to understand. Yes, returns may be conservative compared to pure equity funds during roaring bull markets. Yes, expense ratios tend to be higher due to the complexity of managing short positions and hedges. But therein lies their strategic value: they function as portfolio stabilizers that reduce portfolio volatility, provide consistent income, and protect capital during market downturns. For investors building resilient, multi-asset portfolios, this stabilizing effect is worth the cost.

Three Market-Neutral Funds Making the Grade: Performance Snapshot

Among market-neutral options available, three funds have earned recognition as strong performers: Calamos Market Neutral Income (CVSIX), Gateway (GATEX), and Hussman Strategic Market Cycle Fund (HSGFX)—each holding top tier Zacks Mutual Fund Rank ratings and outperforming peer categories.

Calamos Market Neutral Income stands out for its diversified approach. The fund invests across equities, convertible securities, and high-yield bonds, using short selling, swaps, and options to both generate income and hedge downside risk. Its portfolio typically focuses on convertibles with 2-to-10 year maturities, balancing growth potential with income stability. Notably, legendary fund manager John P. Calamos has led this fund since 1990, bringing three decades of market-cycle experience. The fund’s three-year annualized return of 7.6% reflects this disciplined, income-focused approach.

Gateway takes a different but complementary approach, emphasizing volatility reduction through option-based strategies. The fund invests in diversified equities but constrains gains during strong market rallies—a deliberate choice that protects portfolios when sentiment shifts. Over the past three years, Gateway has delivered 13.4% in returns. As of mid-2025, the fund held 187 equity positions with selective concentration, including an 8.2% allocation to Nvidia, demonstrating active, conviction-based stock picking.

Hussman Strategic Market Cycle Fund employs tactical hedging to limit portfolio exposure during unfavorable market environments. The fund holds advisor-selected stocks with minimal cash drag, utilizing options, index futures, and other derivatives to adapt positioning based on market cycles. Its five-year annualized return of 0.4% reflects a cautious, preservation-oriented philosophy. With an expense ratio of 1.15%, investors are paying for active market timing and downside protection—appropriate for risk-averse portfolios.

When Market-Neutral Funds Belong in Your Portfolio

John Bostic and other experienced portfolio strategists recommend market-neutral funds not as core holdings but as strategic ballast. They excel in three scenarios: (1) when you’ve already achieved your growth targets and need downside protection, (2) when market valuations appear stretched and volatility may increase, and (3) when diversifying away from correlated equity and bond exposures matters to your risk profile.

These funds won’t deliver the explosive returns of concentrated growth strategies. But that’s precisely the point. By accepting modest, steady returns—7-13% in favorable years, smaller or flat returns during downturns—investors trade the lottery-ticket appeal of outsized gains for the psychological comfort and capital preservation that stabilize long-term wealth building.

For investors tired of portfolio whiplash and seeking consistent performance, market-neutral funds offer a time-tested approach that fits alongside traditional equity and fixed-income holdings. Their role is humble but essential: keeping portfolios on track through multiple market cycles.