Market-Neutral Vs. Beta-Neutral

Hi everyone,

I have an interview with Citadel Global Equities coming up. I want to make sure I am as well prepared as possible, and I am not confident that I fully understand their strategy (specifically in regards to them running a "Beta-Neutral" book).

I was wondering if someone could clarify the difference between "Beta-Neutral" and "Market-Neutral".

From my understanding - "Beta-Neutral" is when the dollar weighted average beta of the book is zero (including long and shorts) and "Market-Neutral" is when a book simply has the same amount of dollars short as they do long.

IE) A portfolio with two stocks, one with a beta of 1 and the other with a beta of -1, if you were long equal amounts of each stock, you would be beta-neutral, but you would not market-neutral.

On the other side of things, if you had a portfolio with two stocks, one with a beta of 1 and the other with a beta of 2, if you were long one and short the other (equal dollars in both positions), you would be market-neutral, but not beta neutral.

Is this correct? Any help or clarification would be greatly appreciated.

 

Someone more knowledgeable please correct me if I'm wrong, but from what I have understood, being market neutral is in reference to some quantitative metric. This quantitative metric could be beta or dollar. So, market neutral could be either beta neutral or dollar neutral depending on the interpretation.

 

From my understanding as well, they should usually be the same thing.. Market Neutral means neutral in terms of correlation to the market... how do we measure correlation to the market.. beta. so, I am not in a great place to be giving advice but from the general understanding, they should usually be the same thing. The only other caveat I would give is that, I guess Market Neutral could be measured by something other than beta, but typically is. Beta neutral seems intuitive... aiming for beta to be 0.

 
Best Response

my take.

both are relative value which tries to have minimal market risk and correlation to the general direction of the market.

Market Neutral would mean being long and short the same nominal exposure (eg, long $100mm of AAPL, and short $100mm worth of GOOG. Your overall market exposure is $0)

Beta neutral simply mean the book is neutral on a beta level and doesn't have to be neutral in terms of market exposure (eg, long $50mm of VRX with beta 2.0 and short $100mm of ZTS with a beta of 1. your beta exposure is 0)

 

I'm not sure there's a standard definition.... but at the fund I work at, which is NOT market/beta neutral, we use "market exposure" to mean ($ in security X) x (beta of security X) = Exposure of X

My hunch is that most firms use market neutral to mean beta neutral...

 

at funds like Citadel, market neutral can mean much more than being beta-neutral. they could look at a number of different risk factors, such as SMB, HML, leverage, etc, and then look at the factor loadings for each stock in their portfolio. what they're trying to do is stay flat on all those various risk factors, and profit from the idiosyncratic, stock-specific trade (or pair-trade) they put on.

 

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