How hedged are market neutral funds?

So I'm wondering how much hedging do market neutral L/S funds actually do?

I mean, there are some funds that claim to be market neutral but they seem to hold a basket of 10-20 longs and balance that out with some shorts (not necessarily with considerations to beta).

Then there's the other extreme where I guess you can hedge out everything that has an etf (would you?).

I'm curious, what are the main risk factors that market neutral funds hedge out?

How does this change for L/S managers vs. stat arb funds?

Comments (11)

Feb 11, 2019

part of the portfolio construction process for market neutral funds is constraining the portfolio such that the dot product between the stock weight vector and vector of stock betas is equal to 0, which over time leads to an overall market beta of very close to 0.

Feb 11, 2019

Deep is correct. Essentially the portfolio is uncorrelated to the market hence why its neutral, beta 0. They're trading the relative performance, whatever that may be... they can't be totally risk free, then they wouldn't make any money.

Feb 11, 2019

but that's beta. What about sector, momentum, size, volatility etc risk?

Feb 11, 2019

In practice most major market neutral funds are also hedged to both factors (momentum, value, etc.) and sector exposure, though some of the smaller ones are comfortable making some (explicit or implicit) sector or factor bets. Typically though, market neutral funds are fairly tightly hedged on almost any dimension you could think of.

Feb 11, 2019

The whole thing's a scam

    • 1
Learn More

814 questions across 165 hedge funds. 10+ Sample Pitches (Short and Long) with Template Files. The WSO Hedge Fund Interview Prep Course has everything you'll ever need to land the most coveted jobs on the buyside. Learn more.

Feb 24, 2019

Depends on whether the long/short manger is claiming to be beta neutral, dollar neutral or both

Mar 1, 2019