Building a Better Equity Market Neutral Strategy

April 10, 2015
  • Contributors:

    Gabriel Feghali, Dan Villalon
  • Topic:

    Equities, Risk Management

AQR White Paper

Equity Market Neutral (EMN) is a well-established strategy designed to deliver positive performance without exposing investors to the risk of the overall equity market. By definition, returns of EMN funds should be uncorrelated to traditional equity returns. EMN strategies are designed to make money when long positions outperform short positions, regardless of overall market direction. Thus, their returns are often considered pure alpha, and may be expected to improve a portfolio’s expected returns, reduce its volatility, or both.

EMN works by taking long positions in stocks that are expected to outperform their peers and short positions in stocks expected to underperform. The positions are chosen so that the equity market exposure of the long side of the portfolio is offset by the exposure of the short side. This results in a strategy that is hedged to the aggregate stock market, thereby insulating investors from the major ups and downs in equities.

Institutional investors have long embraced alternative strategies such as EMN, whose long-term efficacy and diversification benefits have added significant value. With the emergence of liquid alternatives, a wider range of investors will be able to access these valuable tools so as to improve the diversification and enhance returns of their portfolios.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
  • This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
  • Past performance is no guarantee of future results.
  • Certain publications may have been written prior to the author being an employee of AQR.