During a bear market in which many stocks suffered huge declines, you'd think that an investment designed to eliminate market exposure would have done extremely well. Unfortunately, despite what should have been the perfect environment for them, many market-neutral mutual funds failed to deliver on their promises, leaving investors who had hoped to eliminate market risk with unexpected losses.

Why market-neutral?
The idea behind market-neutral fundsisn't complicated. Unlike most mutual funds, in which shareholders own a portfolio of stocks, market-neutral funds use a combination of stock purchases and short selling in an attempt to cancel out the impact of movements in the overall stock market. By buying stocks that they expect to outperform the market and selling stocks short that they think will do badly, fund managers seek absolute returns that theoretically should be the same regardless of whether the overall market rises or falls.

That theory is one that many hedge funds have used successfully over the years. But many mutual funds, even at some well-known fund companies, haven't managed to translate the concept for their shareholders. Here's a sample of how some of these funds have performed during 2008 and 2009.

Fund

2008 Return

YTD 2009 Return

Vanguard Market-Neutral Inv (VMNFX)

(8.2%)

(11%)

James Market Neutral (JAMNX)

(5%)

(17.1%)

Janus Long/Short A (JALSX)

(23.9%)

1.4%

Calamos Market Neutral Income A (CVSIX)

(13.3%)

10.9% Continued...