Market-neutral
Balancing long and short positions so the portfolio's net exposure to the market, its beta, is close to zero. The return then comes from the spread between the longs and the shorts, not from the market's direction.
Where you will meet it
Market-neutral appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Discuss the ways hedge fund strategies can be grouped
“Equity strategies trade shares and differ in net exposure: long/short equity, dedicated short bias and equity market neutral.”
- Weigh the risks, costs and alpha potential of long-only, long extension, equitized market-neutral and long/short equity portfolio structures
“A market-neutral long/short portfolio removes market beta, so its return is the spread between longs and shorts plus interest on cash; equitising it with index futures adds back market exposure.”
- Discuss equity-related hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
“Equity market neutral managers balance longs and shorts to hold beta, and often sector exposure, near zero, using pairs trading or statistical models with leverage to magnify small spreads, so their returns are low-volatility and bond-like.”
See also
Practise it
Practise market-neutral until it is automatic: questions that explain every wrong option.
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