Vanguard’s Market Neutral Fund: 9 Months Later, Down Another 10% (MUTF:VMNFX)

My Warning in February

On Feb. 23, I wrote an article on the poor performance of Vanguard’s Market Neutral Fund (VMNFX) since inception in Nov. 1998. I pointed out that VMNFX had declined 8% in the prior 5-year period while the S&P grew 75%, and that since inception it provided tiny annualized growth (1.5%) and an unimpressive Sharpe ratio. Although poor performance of one market-neutral fund doesn’t invalidate all such funds, I suggested short-term bond funds like VFSTX as a more reliable source of market-neutral alpha.

9-Month Check-In

Growth of $50k over the last 9 months for VMNFX, along with Vanguard’s S&P 500 fund VFINX and VFSTX, is shown below.

Figure 1. Growth of $50k for VFINX, VMNFX, and VFSTX from Feb. 24, 2020, to Nov. 20, 2020.(Source: Author)

We see that the S&P fell ~30% in March due to COVID, but recovered in a few months and ended at +11.7% over the period. VMNFX also dipped in March, but remained flat/decreasing throughout the period, ending at -9.7%. The short-term bond fund VFSTX generated smooth growth with net +3.3%.

Let’s take a look at annualized growth vs. Sharpe ratio for these 3 funds, split into two periods: up to my Feb. article, and since then.

Figure 2. Annualized growth vs. Sharpe ratio for VFINX, VMNFX, and VFSTX.(Source: Author)

On the left, we see VMNFX providing 1.5% annualized growth with a far worse Sharpe ratio than the S&P. Lower raw and risk-adjusted returns is always a red flag, but especially here given the magnitude of underperformance in both measures and the long time frame. VFSTX has no such red flag; in exchange for lower raw growth relative to large-cap equities, it provides far better risk-adjusted growth. On the right, we see continued strong performance for VFSTX, while VMNFX took a nosedive. In my view, 10% dips are unacceptable for any fund that averages 1-2% annualized.

Consider a similar visualization for alpha vs. beta, keeping in mind that market-neutral funds aim to generate positive alpha with beta around 0. Clearly, VFSTX is the more reliable alpha generator.

Figure 3. Annualized alpha vs. beta for VFINX, VMNFX, and VFSTX.(Source: Author)

Cumulative Performance Metrics

This recent 10% loss can’t be good for VMNFX’s already poor lifetime performance. Indeed, it now sits at 1.0% annualized growth with a 25.6% max drawdown.

Fund Annualized Growth (%) Max Drawdown (%) Sharpe Annualized Alpha (%) Beta
VFINX 7.3 55.3 0.029 0.0 1.00
VMNFX 1.0 25.6 0.010 1.4 -0.01
VFSTX 3.9 8.3 0.108 4.1 -0.02


I really can’t imagine a bull case being made for VMNFX; it’s performed so poorly over such a long time frame. I don’t think you could market 1% annualized growth over 22 years even with an incredibly high Sharpe ratio and zero drawdown. Its Sharpe ratio is terrible and its max drawdown is 25.6%.

Vanguard says VMNFX “may be appropriate for a small portion of an already well-diversified portfolio.” In my view, it wouldn’t be useful in any portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author used Yahoo Finance to obtain historical stock prices and used R (including the “stocks” package) to analyze data and generate figures.

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