difference between neutral long-short strategy and long-short strategy

CFA Level III Equities
#1

Could anyone help me to understand what is the difference between market neutral long-short strategy and long-short strategy?

How neutral long-short strategy can creat beta = 0. what type of mechanism market neutral long-short strategy use to creat beta = 0. I read the curriculum, but totally do not understand how does it work. I really need your expertise.

Thank you in advance!

#2

If you’re long 130% in stocks with an average β of +0.3 and short 30% in stocks with an average β of +1.3, then your portfolio β is:

β = (130% × 0.3) + (-30% × 1.3) = 0.0.

#3

Thank you so much for your help!

But could you please tell me: What is the difference between long-short market neutral strategy and long-short strategy?

thanks in advance

#4

Market-neutral long-short equity is just a special case of long-short equity. Long-short equity just means you’re long some equities or equity indices and short some equities or equity indices. Your exposure could be negative (net short= more short exposure than long exposure), positive (net long= more long exposure than short exposure) or neutral (net neutral= same long and short exposure).

I think the reading refers to these on a market-sensitvity basis, so the long and short exposure are looked at in terms of beta-adjusted exposures rather than just dollar exposures.

Hope this helps.

#5

Thanks Aschwert33 for your big help!

But Can you help me with the next question. How can the company make money with neutral long-short strategy ? if their expose to the market is 0.

Hope to hear from you and others soon!

#6

market neutral - the net beta is zero. – essentially in the same industry.

long-short - buying stocks they consider undervalued, selling those that are overvalued.

– if the long stock goes up and the short stock goes down - they are being rewarded for their insights.

and hence earn alpha.

#7

Thanks CPK123