Equitizing Market Neutral Long Short

CFA Level III Equities
#1

Trying to make sure I have this straight-

in a normal market neutral long- short, the manager takes a long and short position in under and overvalued positions, respectively, with matching size and beta exposures for a net zero beta. Underlying capital invested in MMKT fund earning risk free rate. Earns two alphas and 0 beta.

is the only difference in an equitized market neutral position that the underlying capital is invested in an index, or futures, or other bets exposure instead of a money market fund?

thanks!

#2

…and if futures, after posting collateral, the remaining capital could still be invested at the risk free rate…correct? Thanks!

#3

>> in a normal market neutral long- short, the manager takes a long and short position in under and overvalued positions, respectively, with matching size and beta exposures for a net zero beta. Underlying capital invested in MMKT fund earning risk free rate. Earns two alphas and 0 beta.

it should be earning alpha, not two alphas. yes , earning two alphas

the underlying capital is invested already, is there extra capital for investing in money mkt fund?

the extra capital is from the short position.

#4

Either 1 earns two alphas.

How I understand now:

If you equitize you (Go long, go short, take short cash invest RF, buy future or ETF dependent)

  • Alpha from Long
  • Alpha from short
  • Gain/Loss from futures
  • +Cash invested in RF rate.

If you go Neutral you should be able to get

  • Alpha long
  • Alpha short
  • RF on cash if you invest i

if you go Long/Short extension you get:

  • Alpha Long, Alpha short.
  • Alpha comes from same source (I’m assuming same equity index/market, where as Equitize comes from wherever you want it).

Also good:

  • If truly market neutral = Earn Risk free, that is your bench (as long as you aren’t leveraged)
  • If Equitize, your bench is an equity bench.