Market Neutral Funds: Powered by Beta?

Evaluating the neutrality of equity market neutral funds

November 2020. Reading Time: 10 Minutes. Author: Karl Rogers & Nicolas Rabener.


  • 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


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?

Mutual fund managers would argue that market neutrality requires complex shorting, but that is a poor excuse. First, shorting can be done via futures or ETFs, which is cheap and straight-forward. Second, shorting can be operated by a centralized risk management team, so that the fund manager can exclusively focus on stock picking. And finally, actual shorting does not need to take place, it would even help capital allocators if performance was reported market neutral.

The sad truth is that most mutual fund managers do not generate alpha as evidenced by the S&P SPIVA Score Cards, which report that funds underperform their benchmarks over the short- to long-term, across market segments, and geographies. Showing performance in a market neutral fashion would simply put most fund managers out of their jobs.

For example, Fidelity launched a market neutral fund in Europe in 2008 that went long the stocks considered the most attractive and short the ones deemed least attractive by the firm’s team of fundamental analysts. It is worth recalling that Fidelity employs hundreds of highly-educated and experienced research analysts and portfolio managers, has access to the management of even the largest companies globally, relationships with every sell-side institution, and all relevant data and analytical systems. It is difficult to imagine a better set up for generating alpha via stock picking. However, the fund was liquidated in 2013 af