Long & Short = market neutral?


Whys is it that they say that a long & short strategy is necessarily market neutral - i.e. it is not impacted by systemic risk, no matter the direction or intensity or the movement on the market.

I mean, even if you buy a pair trade (long/short within the same sector), the two stocks will likely have different sensitivities to market factors, right? (e.g. one company could have more debt indexed to interest rates).

Are we implicitly assuming all else equal the portfolio will be immune to systemic risk?


Not all long-short strategies are market neutral. I’m not sure where you read that.

The alpha portion of an alpha-beta separation strategy is market neutral (or, at least, is supposed to be), but that’s only one type of long-short strategy.

Hehe make sense.

They say that long short is one way to achieve market neutrality. I guess I generalized, but it makes sense. I’d say usually long/short DOES NOT equal to market neutrality.

Thanks s2000magician. By the way, where you based in the US?

You’re quite welcome.

I’m on the West coast, near Los Angeles.

And you?

Cool. Another one for you.

They say that the return on an investment with no systematic risk should earn the Rf. Why is that in the case of a long/short that is market neutral? How about the return from the long/short strategy? I mean, on CFAI text they kind of mention that to equitize a portfolio, the manager uses the proceeds from the short sale to buy ETFs or futures. Isn’t that cash usually used to buy the long position on the stock? Do they mean that the portfolio holds extra cash?

I thought you were in NY. Will be there for 2 years for my MBA.

Not all long-short strategy is market netural. Mark it.

what about:

all market neutral strategies are long-short strategies?

i got confused with the wording.

Let’s say you’ve selected 50 companies and used s&p constituents as your investment universe then you’ve shorted s&p 500 etf $Spy. Then you’ve eliminated the risk attributed to the market and your left with the company specific risk premiums. So you get compensated on how your picks do regardless of which direction the market move.