TAILIEUCHUNG - Hedges on Hedge Funds Chapter 9

CHAPTER 9 The Time Is Now for Equity Market Neutral. As is the case with convertible arbitrage and fixed-income hedge fund investing, equity market neutral is characterized as a relative value strategy. However, it is not pure arbitrage; this strategy generally trades on the differences in value across a wider range of less closely related securities | 9 The Time Is Now for Equity Market Neutral As is the case with convertible arbitrage and fixed-income hedge fund investing equity market neutral is characterized as a relative value strategy. However it is not pure arbitrage this strategy generally trades on the differences in value across a wider range of less closely related securities which is not the case in convertible arbitrage and fixed-income arbitrage. Equity market-neutral managers construct portfolios that have close to equal amounts of offsetting long and short equity positions. By balancing long and short positions market-neutral managers attempt to mitigate events that affect the valuation of the stock market as a whole which implies very low or no correlation to the market. Investors in equity market neutral strive to generate consistent returns in both up and down markets. To determine the right time to start ramping up the market-neutral allocation to one s investment portfolio it is first necessary to understand what has been holding this strategy back as compared to other strategies. Examination of recent past performance might help determine when these adverse conditions have been alleviated. Investor sentiment points to the lack of market volatility as the culprit yet this is not entirely accurate. Although volatility is indeed vital to the success of many market-neutral strategies statistics support the fact that volatility is not the sole issue with which to be concerned. The popular VIX Chicago 133 134 HEDGES ON HEDGE FUNDS Board Options Exchange volatility index which measures implied volatility has been registering a comfortable mid-20s reading since 1997 which is impressive considering that a register of 20 is considered healthy volatility. This average had not been seen since the Gulf War days and suggests no lack of overall market volatility. That index is however not perfect because it measures end-of-day implied volatility intraday volatility would provide a better sense of the .

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