Could anyone help me to understand what is the difference between market neutral long-short strategy and long-short strategy?
How neutral long-short strategy can creat beta = 0. what type of mechanism market neutral long-short strategy use to creat beta = 0. I read the curriculum, but totally do not understand how does it work. I really need your expertise.
Thank you in advance!
If you’re long 130% in stocks with an average β of +0.3 and short 30% in stocks with an average β of +1.3, then your portfolio β is:
β = (130% × 0.3) + (-30% × 1.3) = 0.0.
Thank you so much for your help!
But could you please tell me: What is the difference between long-short market neutral strategy and long-short strategy?
thanks in advance
Market-neutral long-short equity is just a special case of long-short equity. Long-short equity just means you’re long some equities or equity indices and short some equities or equity indices. Your exposure could be negative (net short= more short exposure than long exposure), positive (net long= more long exposure than short exposure) or neutral (net neutral= same long and short exposure).
I think the reading refers to these on a market-sensitvity basis, so the long and short exposure are looked at in terms of beta-adjusted exposures rather than just dollar exposures.
Hope this helps.
Thanks Aschwert33 for your big help!
But Can you help me with the next question. How can the company make money with neutral long-short strategy ? if their expose to the market is 0.
Hope to hear from you and others soon!
market neutral - the net beta is zero. – essentially in the same industry.
long-short - buying stocks they consider undervalued, selling those that are overvalued.
– if the long stock goes up and the short stock goes down - they are being rewarded for their insights.
and hence earn alpha.