In the past we've looked at using a tactical overlay, gold, and commodities to improve an asset allocation strategy. Now we'll look at the advantages of a 10% allocation to a Long/Short fund and a 10% allocation to a Market Neutral fund to consider their roles in constructing and managing an asset allocation strategy.

First the Vanguard Market Neutral Fund (VMNFX) which has been around since November 1998.

Here is the correlation of the fund against the Vanguard 500 Index Investor fund (VFINX). Market Cycle I (Blue): October 2007 – September 2014, Market Cycle II (Red): August 2000 – October 2007.

Overall the Vanguard Market Neutral fund had low correlation to domestic large caps in both cycles and particularly in the 1st stage downtrend of a cycle. Therefore it has good potential as an alternative allocation in the context of an overall strategy.

The next chart illustrates the advantage of a 10% allocation to the Vanguard Market Neutral fund on the basis of cumulative growth utilizing Vanguard domestic index funds for comparison strategy purposes.

Base Strategy-

Alternative Strategy-

The chart illustrates a market neutral advantage (Alternative Strategy – Base Strategy) of cumulative growth in the 1st stage downtrend of a cycle as the 10% allocation acts to protect the portfolio. In both cycles, we can see greater overall asset growth reach as high as 4% with the Alternative Strategy.

In the 2nd stage uptrend, the results were mixed …. it continued to add to cumulative growth in Cycle II and acted as a drag in Cycle I.

Next we are looking at a fund which has improved cumulative asset growth in both stages of a market cycle … the Robeco Boston Partners L/S Equity Inv (BPLEX) acts to enhance an asset allocation strategy.