Which of the following is the correct benchmark for a market neutral long-short strategy equitized with S&P 500 futures contracts? A) The risk-free rate. B) The S&P 500 index. C) The S&P 500 index plus the risk-free rate.
I am picking C.
A
B. S&P 500 Futures + Risk free rate = S&P 500 Index
b
D, for the block!
In theory we have no market exposure (market neutral) thus the S&P index doesn’t fit. We are just eliminating market risk with the S&P futures. I think the risk-free is correct.
I’m going with B. The L/S strategy provides alpha and the S&P futures provide beta exposure. The futures are used to equitize (add equity exposure) to the portfolio.
Your answer: C was incorrect. The correct answer was B) The S&P 500 index. If a long-short, market neutral strategy is equitized, the benchmark is the underlying index of the futures contract (in this case the S&P 500).
GetSetGo Wrote: ------------------------------------------------------- > B. > > S&P 500 Futures + Risk free rate = S&P 500 Index GSG can you explain the above. I don’t think I get it. Thanks!
F = S*e^Rf so S = F * e^ -Rf S&P 500 Index = S&P 500 Futures + zero coupon treasury with expiration equal to the futures contract maturity.
McLeod81 Wrote: ------------------------------------------------------- > I’m going with B. The L/S strategy provides alpha > and the S&P futures provide beta exposure. The > futures are used to equitize (add equity exposure) > to the portfolio. To be market neutral we need an offset to Beta gained from long the futures position. Couldn’t an active large cap short equity manager serve as the Beta offset and the source of potential alpha? If they are truly market neutral, I don’t see how the SP5 is the benchark seeing as how that risk is what we are trying to eliminate. If the manager can increase/decsrease Beta exposure at will then there will be complications in determining the correct index. I imagine the majority of the time the manager would be long an active strategy and short futures. Does this make any sense?
The manager could be long /short using futures on the short end, but in this particular case the Long short strategy is being equitized, meaning that a long futures overlay is being applied on top of the (previously zero beta) long short portfolio. The resulting portfolio is no longer market neutral as a result of the S&P 500 futures overlay.
The question says market-neutral + equatizing with futures. Market neutral bench mark is risk free rate. If you equatize with futures of Index A, your benchmark is (Index A - risk free rate) because you are getting index exposure with futures and can invest the rest at risk free rate. so we have … risk free rate (for market neutral) + (S&P 500 - Risk free rate) for futures = S&P 500. Hope this helps. Cheers 
I am too greedy.
Excellent explanation, GetSetGo and McLeod!
C that is