Market Neutral Strategies: Investing regardless of the market
Market Neutral Strategies: Investing regardless of the market (profiting when markets rise and fall)
The biggest problem and fear of every investor is if the entire macro environment starts to fall / correct sharply ( e.g. the entire indices S&500, DJI, Nasdaq 100, etc.) and it starts all at once drag down the prices of almost all stocks in his portfolio. If he does not have time to react and sell shares, or hedge using derivatives – futures , shorts , options, he usually has a problem because investors in his fund usually do not like to see 30-50% losses.
Large hedge funds, quantitative funds, but also experienced individual investors/ traders therefore like to use the so-called market neutral methods: thanks to these strategies, they can profit both in the rising and falling phases of the market and thus partially or almost completely avoid slumps. There are even special methods using market imperfections where profit is almost always guaranteed. Of course, nothing is free and additional protection can be reflected in reduced growth and less gain , also the market can behave differently than expected in turbulent times and the models may not work exactly as they were designed, or with almost risk-free methods there is a problem with the speed of execution , latency and liquidity so someone can come faster. Nevertheless, the market neutral methods are a very interesting branch of investing/ trading and many of the most successful algorithmic funds have built their very successful businesses on them – they have created their own modified approaches that minimize the risks of slumps and can work so well even in rising and falling markets while they do not have to predict the future to such an extent as long only investors and traders .
Let’s look at the 2 basic methods.
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