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Market Neutral Funds: Powered by Beta?

Evaluating the neutrality of equity market neutral funds

Karl Rogers & Nicolas Rabener
10 min read
9 Nov 2020

SUMMARY

  • The long-term track record of equity market neutral hedge funds is attractive, but should be viewed with scepticism due to Madoff and survivorship bias
  • Only one index from HFRX seems sound, but his highlights negative alpha since the GFC and positive returns primarily from market beta
  • A factor exposure analysis reveals unusual factor loadings

INTRODUCTION

The mutual fund selection process would be significantly simpler if every mutual fund was structured market neutral. It would take a capital allocator less than a minute to decide if a fund manager has been generating alpha and is worth allocating to, or not. In contrast, the current modus operandi requires calculating the difference between the mutual fund and a benchmark, which is complicated. Why not make allocating capital as simple as possible?

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