There is one concept that I didn’t really understand. It’s about Hedge fund long/short technique.
According curriculum, if you are market neutral on a position you have long and short and beta nul so no exposition. But you can generate an alpha so you make money. Can someone give me a concrete example. For me, if you long and short a stock for example, with no systematic risk, you generate no money (if you win on the long you will loose same amount on the short). And there is nothing about the idiosyncratic risk so if someone can give me an explanation.
I can’t remember for sure, but I vaguely remember that you buy futures (beta of 0) and make money that way.
You even exploit inefficiency on the long and short side by buying a stock that’s under priced with a positive beta and short another stock that’s overpriced (giving you a negative beta ).
You combine both and you create alpha when your long stock goes up in value and your short stock goes down in value while your beta is 0.
Unless you’re doing something terribly wrong, you must not “not make money”, and as a CFA level 3 candidate (I assume, since you’re asking the question here), you should know this. If you don’t take any risk, you should earn EXACTLY the risk-free rate.
Long short strategy isn’t even risk-free. It does not mean you’re long a stock worth 50 and short the same stock for 50. It means you’re long a stock you believe is underpriced and simultaneously short a stock you believe is overpriced in the same industry. That way you take no systematic (non-diversifiable, market) risk, but if you’re predictions are correct you will make alpha from the specific stocks you chose.
Yep. What nenorr said. They are l/s in different securities. They take active risk by having different weights from the benchmark to (hopefully) generate alpha.
Think of it this way for simplicity; they’re long google and short yahoo.
Is it not that you are for example market neutral in one sector, for example you are short BMW (because you think it is overvalued) and long Mercedes (because you think it is undervalued) and can are market neutral. You can however create an alpha if your bets are correct.