From the Hedge Fund Association, a white paper entitled: "Creating Alpha with Market Neutral Strategies"
" Market neutral investing is perhaps the purest form of alpha as, by definition, it removes exposure to market direction and produces alpha through security selection. It usually involves the simultaneous purchase of an undervalued security and short sale of an overvalued security. Thus, the return depends on the spread between the long and short positions. A bond market neutral strategy would hedge out interest rate risk, to ensure that gains from the long position, due to upward movements in bond prices, would be roughly offset by losses from the short position. Unlike traditional investing, which concentrates on absolute returns, or returns relative to a benchmark, market neutral returns depend on the spread or relative value between the securities bought and sold regardless of movements in
market direction. An equity market neutral portfolio is constructed
similarly, but this time exposure to beta, the sensitivity of the
portfolioâs movement to the general market, is hedged. A true
market neutral fund will have to balance the beta on the long and
the short side to hedge out stock market risk effectively. A market
neutral approach can be applied to various asset classes, such as
equities, government bonds or mortgage-backed securities and
forms the basis for several investment strategies: convertible
arbitrage and risk/merger arbitrage. "
" Market neutral investing is perhaps the purest form of alpha as, by definition, it removes exposure to market direction and produces alpha through security selection. It usually involves the simultaneous purchase of an undervalued security and short sale of an overvalued security. Thus, the return depends on the spread between the long and short positions. A bond market neutral strategy would hedge out interest rate risk, to ensure that gains from the long position, due to upward movements in bond prices, would be roughly offset by losses from the short position. Unlike traditional investing, which concentrates on absolute returns, or returns relative to a benchmark, market neutral returns depend on the spread or relative value between the securities bought and sold regardless of movements in
market direction. An equity market neutral portfolio is constructed
similarly, but this time exposure to beta, the sensitivity of the
portfolioâs movement to the general market, is hedged. A true
market neutral fund will have to balance the beta on the long and
the short side to hedge out stock market risk effectively. A market
neutral approach can be applied to various asset classes, such as
equities, government bonds or mortgage-backed securities and
forms the basis for several investment strategies: convertible
arbitrage and risk/merger arbitrage. "
