All: My understanding is that market neutral (L/S) strategy will eliminate systematic risk, but will it generate excess equity returns in the chosen style? Please share your thoughts!!
L/S stratey will eliminate systematic risk as it evens out the exposure to market. It is an alpha seeking strategy thr security selection. As it underweights the overpriced and overweights the underpriced.
wait wait wait…i thot market neutral strategy will eliminate non-systematic risk (thats why its called market neutral) and generates alphas by going long and short on the securities. If you want to equitize it, you go long the underlying amount invested in some futures or derivatives that you want. I hope this is right, otherwise its back to the grind. Oh Lawdy Lawd !!!
the above is true if you are long/short in the same industry…just to add
Oh crap…my bad…confusing systematic risk with non-systematic risk… think i am going to take the weekend off
sparty419, My understanding is as follows. Market neutral strategy : Buy one stock which is under-valued and short another which is over-valued in the same industry. This will eliminate systematic risk so that beta =0 (that’s why its called market neutral) and generates 2 alpha. Systematic risk can be added by using equity futures or ETF.
Yup…thats exactly what I was trying to say…just that I got really messed up on systematic risk and non-systematic risk…sorry for the confusion…
How about some portable alpha?
Potable alpha (Alpha & Beta Separation) seems to be the opposite side of Market neutral strategy. Potable alpha : Gains a systematic exposure (beta) through a low-cost index fund or ETF while adding alpha through a market (long-short) neutral strategy.
Just to confirm that the return will not be risk free due to the two alphas