Market and factor neutrality
Couple questions to pod PMs as platforms seem to handle these differently:
- are any longs shorts plugged to achieve market / factor neutrality? Eg prop system suggesting stocks without doing full blown fundamental work
- what % of AuM or gmv are indices and or basket trades to again achieve market / factor neutrality?
- is market and factor neutrality risk managed daily or weekly?
- how do more binary outcome strategies hedge their longs? Eg event driven PMs
Based on the most helpful WSO content, here's what I can share about market and factor neutrality:
Some long/short strategies do use prop systems to suggest stocks for achieving market or factor neutrality. However, this doesn't replace the need for fundamental analysis. It's more of a tool to aid in decision-making.
The percentage of AuM or GMV that are indices or basket trades can vary greatly depending on the fund's strategy and risk tolerance. It's hard to give a specific number without more context.
Market and factor neutrality is typically risk managed on a daily basis. However, this can also depend on the specific strategy of the fund. Some might adjust their positions more frequently, while others might do so less often.
For strategies with more binary outcomes, such as event-driven PMs, hedging long positions can be a bit more complex. They might use options, futures, or other derivatives to hedge their positions. They could also potentially use pairs trading or other relative value strategies.
Remember, these are general insights and the specifics can vary greatly depending on the fund's strategy, risk tolerance, and other factors.
Sources: How hedged are market neutral funds?, Leaving a single manager to start a book at a platform, Routes to Buyside PM
Bump
Any pod PMs can chip in?
#1,2: it depends. Too long an answer.
#3: definitely daily. Brutal rotations can happen within a day, let alone a full week.
#4: if you're doing merger arb, you could bet on some deals closing and others breaking.
Thanks, appreciate any color on the first 2 points.
Very important Qs and interested in hearing other PMs thoughts. It depends on the strategy and platform. Some equities platforms do propose shorts, for instance, to fulfill hedges and neutrality. Think covering single vertical pair trades are common, basket hedges less so and there is a % cap usually. Arb is binary in case of cash offers, not sure how other eventy stuff is hedged.
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