De-Equitizing long-short alpha

CFA Level III
#1

In reading 23, when discussing long/short market neutral strategies, the author goes on to discuss how you can add beta (systematic exposure) through equtiy futures… makes sense.

He then discusses ETFs as being a better option for Inst Investors b/c of they are easy to borrow for large scale short-sale transactions. But the discussion is still under market neutral long / short strategies. If the portfolio is market neutral, what is the desire to de-equitize? No systematic risk exists…

I can only think of 2 reasons

  1. The author has moved on from a pure market neutral strategy and the fund has greater long exposure than short exposure. So they want to de-equitize to make the systematic risk 0.

  2. Even if the fund is pure mkt neutral with 0 systematic risk, they have an overall negative view of the equity market, and want to capture that through shorting ETFs.

They also suggest that ETFs may be better for Inst Inv at equitizing a position… but the discussion on the advantages of ETFs is purely focused on their benefits when it comes to short selling. What is the advantage with long ETFs?

Page 206/207 for reference.

Any guidance on this?

#2

I haven’t the reading, so I’m stabbing in the dark here: is it possible that they’re shorting ETFs _ to arrive at _ zero beta?

#3

Yeah, that’s what I was talking about in scenario 1 above. But it’s strange because it is specifically under a section entitled, “equitizing a market-neutral long-short portfolio.” I suppose it’s just poor labeling, because there is no indication that they have moved on from a pure market neutral strategy.