What Exactly is “Market Neutral” Anyway?
Dec 3rd, 2006 | Filed under: Performance, Analytics & MetricsNaturally, the main attraction of market neutral funds is that their performance is not correlated with markets. But usually the term “market neutral” refers to the current positions held in the fund, not its actual performance vs. markets. The aggregate beta-weighted exposure of a hedge fund is rarely the same as the eventual market beta of the fund’s track record. In fact, these numbers are usually quite different. Paying too much attention to the holdings in the portfolio at the expense of the fund’s overall performance is like missing the proverbial forest for the trees.
Market neutral hedge fund managers will often talk about a certain amount of beta that will “work its way into” their funds. They say it’s inevitable given the large number of trades they makes and the plethora of factors they try to neutralize.
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