Market Neutral - Equity-market-neutral

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, 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.