Market Neutral Investments

Posted by BOPtrader on August 19th, 2014

Stock pickers should take on new methodologies and trading systems to play efficiently in the global markets. When you go beyond the tradition, you have always something new to show in the market. Such novelties comes with research. There is a concept called market-neutral investing.

Joseph G. Nicholas, founder and chairman of HFR Group, wrote in his 2000 book “Market Neutral Investing: Long/Short Hedge Fund Strategies”: “Market-neutral investing refers to a group of investment strategies that seek to neutralize certain market risks by taking offsetting long and short positions in instruments with actual or theoretical relationships. These approaches seek to limit exposure to systemic changes in price caused by shifts in macroeconomic variables or market sentiment.”

The various market-neutral strategies invest in different asset types; for instance, convertible arbitrage takes long positions in convertible securities and short positions in common stock. As another example, merger arbitrage takes long and short positions in the stocks of companies involved in mergers. Market-neutrality can be achieved either at the individual instruments level or at the portfolio level. While the strategies are very different, both in terms of assets and methodology, they all fall under the market-neutral umbrella. This is because each derives returns from the relationship between a long and a short component – either at the individual instruments level or at the portfolio level.

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Now let’s talk about equity market neutral strategy. A slightly different but a concept for similar objective. It’s a strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors. This can be an ultimate weapon for stock pickers as finally stock picking is all that counts. Recoveries of the short investments are done in the long investments themselves.

So like this, find new ways around in investments and lead. Out and out, stock picker’s profit is most important.