Market Neutral Long/Short Equity Trading

Overview: Managers of market-neutral long/short equity hedge funds make scores of investments like this, picking stocks they believe are sufficiently balanced to keep the portfolio buffered from a severe market swing. Typically, they make sure the baskets of long and short investments are beta neutral. Beta is the measurement of a stock’s volatility relative to the market. Many practitioners of market-neutral long/short equity trading balance their longs and shorts in the same sector or industry. By being sector neutral, they avoid the risk of market swings affecting some industries or sectors differently than others, and thus losing money when long a stock in a sector that suddenly plunges and short another in a sector that stays flat or goes up. Keeping portfolios balanced is an obvious part of market-neutral long/short equity trading, especially when trying to maintain a constant dollar-neutral portfolio. The article points out that while quantitative analysis is the most common method for identifying optimal long and short positions, some hedge fund managers rely on fundamental analysis, systematically analyzing industries and companies to find those on the brink of positive, or negative, change.

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Format: HTML | Date: Jan 2003 | Pages: 1