I kinda think John Bogle wouldn't approve of this one...
Vanguard Market Neutral Fund Investor Shares (VMNFX)
"investor class" with a $250,000 minimum investment
https://personal.vanguard.com/us/funds/snapshot?FundId=0634&FundIntExt=INT
And the expense ratio... 1.46%, including "dividend expenses on securities sold short 1.06%".
See page 1 of the prospectus to verify the highest expense ratio I've seen at Vanguard. But also,
one that is out of reach of any investor with under $250k. Neat way to ensure only qualified investors!
This fund has been around for many years. It started right after Bogle stepped down.
The expense ratio is high because it has to include all underlying expenses, including interest paid on leverage and, as you said, dividends paid on shares held short. These are expenses that any investor would have to pay if they took out margin loans or held dividend paying stocks short.
The Vanguard website says that the fee, excluding these expenses, is .25%, which is in line with other investor-class funds. The high minimum investment is meant to filter out people who don't understand the strategy.
Margin loan interest is why many funds have high expense ratios. The expenses aren't always going to the company's pockets. Often the company turns around and pays insurance companies, hedge funds, venture capitalists, and pension funds for the use of capital. What goes into an expense ratio is rarely, if ever, articulated in here.
Funds often use leverage to amplify the yield and/or short-term gains. Whether these atrategies lead to long term value against an index is certainly open to debate.