Market neutral
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Market Neutral
A strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. There is no single accepted method of employing a market-neutral strategy.
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Managers who hold a market-neutral position are able to exploit any momentum in the market. Hedge funds commonly take a market-neutral position because they are focused on absolute as opposed to relative returns.
A market-neutral position may involve taking a 50% long, 50% short position in a particular industry, such as oil and gas, or taking the same position in the broader market.
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Read about a market-neutral trading strategy using relatively low-risk positions. Finding Profit In Pairs
Find out how these mutual funds can add some flavor to your bland portfolio. Getting Positive Results With Market-Neutral Funds
Find out how you can maintain your income stream by using this type of bond strategy. Leverage Your Returns With A Convertible Hedge
Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen. Hedge Funds Hunt For Upside, Regardless Of The Market
Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one. Hedge Funds: Higher Returns Or Just High Fees?
When it comes to hedge funds, this measure is not reliable on its own. How The Sharpe Ratio Can Oversimplify Risk
Some of these claim consistent returns even in declining markets, but they're not immune to risk!
Taking A Look Behind Hedge Funds
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Market neutral
An investment strategy or portfolio is considered market neutral if it seeks to entirely avoid some form of market risk, typically by hedging. In order to evaluate market neutrality, it is first necessary to specify the risk being avoided. For example, convertible arbitrage attempts to fully hedge fluctuations in the price of the underlying common stock.
A portfolio is truly market neutral if it exhibits zero correlation with the unwanted source of risk.[1] Market neutrality is an ideal, which is seldom possible in practice.[2] A portfolio which appears to be market neutral may exhibit unexpected correlations as market conditions change. The risk of this occurring is called basis risk.
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Equity market neutral
Equity market neutral is a hedge fund strategy that seeks to exploit investment opportunities unique to some specific group of stocks while maintaining a neutral exposure to broad groups of stocks defined, for example, by sector, industry, market capitalization, country, or region.
The strategy holds long/short equity positions, with long positions hedged with short positions in the same and related sectors, so that the equity market neutral investor should be little affected by sector-wide events. This places, in essence, a bet that the long positions will outperform their sectors (or the short positions will underperform) regardless of the strength of the sectors. Equity market neutral strategy occupies a distinct place in the hedge fund landscape by exhibiting one of the lowest correlations with other alternative strategies.
Evaluating the Hedge Fund Research index returns for 28 different strategies from January 2005 to April 2009 showed that equity market neutral strategy had the second lowest correlation with any of the other strategies[citation needed], behind only short-bias funds that typically have a negative correlation with all other funds. This result is not surprising given that each fund utilizes the unique insights of a manager, and these insights are not replicated across funds.
Examples of market-neutral strategies
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