A market neutral strategy is usually equitized with futures but can also be equitized with ETFs (Schweser Book 3 page 150). “In an alpha and beta separation approach, the investor gains a systematic risk exposure (beta) through a low-cost fund or ETF, while adding an alpha through a long-short strategy” (Schweser Book 3 page 161). Based on this, is it true to say that equitizing cash is the same thing as alpha/beta separation (or at least is the same if ETFs are used)?
the show NY Wrote: ------------------------------------------------------- > A market neutral strategy is usually equitized > with futures but can also be equitized with ETFs > (Schweser Book 3 page 150). > > “In an alpha and beta separation approach, the > investor gains a systematic risk exposure (beta) > through a low-cost fund or ETF, while adding an > alpha through a long-short strategy” (Schweser > Book 3 page 161). > > > Based on this, is it true to say that equitizing > cash is the same thing as alpha/beta separation > (or at least is the same if ETFs are used)? I don’t think so. When you equitize cash, all you’re looking for is exposure to the stock market. In alpha/beta separation, you want exposure to the market plus the alpha gained on the stocks you are long/short.
I agree that the actual equitization of cash produces a market (i.e. beta) exposure only. This is now just one portion of your whole position, because in addition to the beta you have created you still have the market neutral position, through which you gain alpha. So what I meant was, as a whole, aren’t the two positions quantitatively the same? In each you have a long/short position to give you alpha and market exposure via ETFs to give you beta.
In a market neutral strategy, you’re trying to manage your overall beta to 0, or around it at least. So based on your example, I would think they have a net short position (negative beta) and want to equitize their cash in order to bring beta to 0 by purchasing index futures or ETFs.
An alpha and beta separation approach uses a market neutral long/short strategy, just like the strategy of equitizing cash with a market neutral approach. Page 161 of Schweser Book 3 says “A limitation of the alpha and beta separation approach is that it may be difficult or costly to implement short positions in markets such as emerging markets or small-cap markets. Secondly, some long-short strategies are not truly market neutral and have a degree of systematic risk.” So in both strategies, you have a market-neutral approach to attain your alpha, and you may use ETFs to attain your beta. This was my only point. I am not sure where a negative beta comes into play, as you mentioned.