Market Neutral Hedge Funds: Diversification or Overpriced Beta?

Replicating equity market neutral funds

January 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Equity market neutral generated positive and uncorrelated returns since 2008
  • However, the performance can be replicated with low-cost asset class ETFs
  • On average, there has not been much value creation

INTRODUCTION

The most intense global talent wars today are unfolding in two areas: artificial intelligence and multi-strategy hedge funds. Yet the compensation gap between them is striking. Firms such as Meta are offering AI engineers pay packages that far exceed – often by multiples – the compensation awarded to portfolio managers at leading multi-strategy firms like Millennium and Citadel.

Both sectors are attracting exceptional talent because they are performing well or are expected to do so. Most AI-focused companies, including OpenAI, remain deeply unprofitable, in stark contrast to the large multi-strategy hedge funds, which continue to generate substantial profits.

However, profitability is not the same as value creation. As we have previously shown, the average multi-strategy fund largely delivers diluted equity-like exposure – returns that investors could replicate on their own with relative ease (read Multi-Strategy Hedge Funds & Replication ETFs & Multi-Strategy Hedge Funds: Jack of All Trades?).

In this article, we revisit equity market neutral strategies, which offer one of the clearest lenses for evaluating value creation within the hedge fund industry. These strategies aim to deliver uncorrelated returns, making them the most direct benchmark for assessing whether hedge funds truly add value beyond market beta.

PERFORMANCE ANALYSIS

We use the HedgeIndex Equity Market Neutral Main Index as the benchmark for equity market neutral hedge funds. Originally created by Credit Suisse, the index is now marketed by Mast Investments. It is primarily composed of hedge fund managers employing long and short equity strategies, with approaches ranging from statistical arbit