Market Neutral

Market Neutral - Hassan II Mosque, Casablanca, Morocco
Market Neutral

"Make money on spreads." The market neutral strategies make use of temporary price differences between similar financial instruments. When the manager identifies relative mispricings, he speculates that these spreads will be eliminated and goes long in the relatively undervalued and short in the overvalued instrument.

Usually, there is only marginal market risk because of the opposite positions—the portfolio is market neutral. Sometimes, the residual market risk will additionally be hedged. The aim of the strategy is to get a portfolio with high alpha and zero beta.

The most important market neutral strategies are fixed income arbitrage, convertible arbitrage, and equity market neutral. As the strategy focuses on relative price differences, it is also called relative value strategy.