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The Case for Market Neutral - Part 1
Jan 1, 1999
The well-publicized reversal of fortune suffered by several prominent hedge funds has moved many to fear any investment strategy that advertises the word "hedge." Not all hedge strategies deserve such a stigma. Two recent examples highlight why investors should understand the nuances of and distinctions between different hedge strategies. An article on Long-Term Capital stated, "These bets required the strategists to buy one thing and sell short another, so that they maintained a Swiss-like neutrality to the market." (1) In 1996, David Shaw pointed out that his form's proprietary strategies were "market neutral, meaning the goal is finding these little profit pockets without actually betting on the direction of the market." (2) Executives at Bank of America may to this day be asking themselves, "Was D.E. Shaw really market neutral?" This article discusses the merits of market neutral hedge strategies, particularly as they are practiced by institutional portfolio managers.