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Market Neutral Investing

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Market Neutral Investing

Build Consistent Low-Risk Profits by Creating Your Own Hedged Portfolio

Kaplan Publishing,

15 min read
10 take-aways
Text available

What's inside?

To lower risk and build return, neutral market investors balance long and short positions. The trick is in the buying.

Editorial Rating

7

Qualities

  • Innovative
  • Well Structured
  • Background

Recommendation

Any investor disposed to pick stocks should read this excellent short introduction to the esoteric discipline of market neutral investing. Author Eric Stokes provides a better introduction to investment risk than the usual explanations found in most popular investing books. He also discusses a variety of ways to use the underlying principles of market neutral investing without becoming a full-fledged market neutral investor. Indeed, the quantitative capabilities and research skills necessary to run a market neutral portfolio are far beyond the scope of all but the most well-staffed investment firms. But a simple strategy like purchasing shares in an index inverse fund to hedge the risk of a long index fund could make sense for many investors. To learn if this strategy is right for you, getAbstract recommends reading this book.

Summary

Why Market Neutral

Market neutral investing has been around at least four decades. Its underlying principle is that some stocks are too high-priced and others are too low. Selling high-priced stocks short and buying low-priced stocks creates profit opportunities no matter how the market moves.

Most equity market investors try to profit from market moves. They buy and hold a stock for shorter or longer periods, hoping it will go up so that they can sell it for a profit. But financial research demonstrates fairly conclusively that the biggest single influence on a stock is often the stock market's overall direction. The saying, "a rising tide lifts all boats," fairly well captures the facts of market life. When the stock market goes up, many mediocre stocks rise with it. When it falls, even the best stocks are apt to suffer. Buy-and-hold has made sense historically because stocks have tended to go up over time. But, with this approach you could easily pick stocks that do not rise as steadily as the market. Think Enron.

Some investors overcome the stock-picking problem simply by indexing. Instead of trying to pick a stock that will outperform the market, they buy...

About the Author

Eric Stokes is a money manager and publisher of Market Neutral Strategy, a quarterly newsletter. Previously, he was president of an independent, quantitative investment research firm. A graduate of Michigan State University, Stokes also holds an M.B.A. from Columbia University.

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