Equity market-neutral needs also net $ position=0 ?

Hi Brave Ones,

Does hedge fund strategy EQUITY MARKET-NEUTRAL need also to have a net investment ($) position of zero or is sufficient to have a zero systematic market exposure?

This links with HEDGED EQUITY. Does this strategy also relies in the value of the net position in terms of ($) or is only driven by net short or net long the systematic market exposure?

many thanks and I hope that your preparation is going as well as possible.


On the first part, I would think (not certain) that it does not have to have zero dollar exposure, because the beta of your positions will vary. So for instance, say you long a stock with a 1.2 beta and short a stock with a 0.8 beta, you still have 0.4 beta left, so you would actually need to short more in dollar amount than long, causing a negative net balance. Same could be true in the opposite direction.

Equity Market Long Short - I believe, if my memory serves me right - has to be equal long and short positions in the same industry/sector. It HAS TO BE $ neutral.

Hedged Equity - does not need to have the $ value the same.

Mathematically how would that work? your positions would have to all have the same beta…

beta is market risk, isn’t it. when they are all in the same industry - the net beta effect is 0.

If I invest $x in beta B1, and short $y in beta B2:

total net investment = x - y

total beta = x/(x + y) * B1 - y/(x + y) * B2

Our goal is for total beta to equal 0, so:

x/(x + y) * B1 = y/(x + y) * B2

B1 * x = B2 * y

x is NOT equal to y unless both positions have the same beta. Since x is NOT equal to y, net investment is not equal to 0.

So I am inclined to agree with mark here.

pg 61 v5 from CFAI

“…while neutralizing the portfolio’s exposure to market risk by combining long and short positions. Portfolios are typically structured to be market, industry, sector, and dollar neutral.”

investing x in 1 and y in another is your 130/30 short extension strategy.

I do not have my books with me. But I do remember this. I could be wrong, but would like someone to look up the reference book.

the beta = 0 since it is the same industry and is unaffected by the market movement.

The text is wrong on this, but please let me know if it is definitive that they say that dollar amount should be neutral that way i can regurgitate their bullshit on the test and pass.

Same industry or not, betas vary widely. The beta MUST be the same, and remain the same for that matter, for long and short to offset and result in zero beta. Google has a different beta than Apple…

Of course there is a higher likeliehood of similar market risk (beta) in the same industry, but that does not always hold true, and does not make them equal.

thanks mcap11

thank you ALL AFers.

keep pushing on…one month to impact (prepare your shield!!!)