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Market-Neutral Investing

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Market-Neutral Investing

Long/Short Hedge Fund Strategies

Bloomberg Press,

15 min read
9 take-aways
Audio & text

What's inside?

If you think that hedge fund strategy is too esoteric for a simple guy like you, consider this: The collapse of a single fund — Long-Term Capital Markets — shook the global market to its very foundation.

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Editorial Rating



  • Innovative


Joseph G. Nicholas’ thorough breakdown of market-neutral investing reveals some common threads and some striking differences between the most common strategies. Most of these strategies, some of which are based on newly developed financial instruments, are not available to average investors or even to many mutual fund managers. Instead, they serve as tools for money managers at the world’s largest institutions. Nicholas uses mostly non-technical language and defines all important terms in a glossary, so that even a lay reader can understand. He also keeps math to a minimum. As a result, his book makes the seemingly dry realm of hedge fund investment techniques interesting and accessible while delving deeply into each strategy’s approach to risk and reward. recommends this book to money managers, finance professionals and investors considering a hedge fund investment. But in light of the role that these strategies played in the collapse of former world-beater, Long-Term Capital Management, any student or professional would benefit from gaining at least a cursory notion of how they work - or don’t work.


The term "market-neutral investing" refers to the use of a group of investment strategies intended to neutralize certain market risks by taking offsetting long and short positions in related instruments.

At first glance, these strategies seem to be quite different. But all market-neutral strategies derive returns from the relationship between long and short elements of the portfolio, whether that relationship occurs within the portfolio or within the instruments themselves. These strategies look for investments that are not correlated. Correlated investments offer similar returns under similar market conditions. Market-neutral strategies look for pairs of investments that behave differently under a given set of market conditions.

Market-neutral strategies provide returns similar to those of long-only strategies, but with less volatility. Their risk-to-return ratios are greater than long-only strategies. Most mutual funds cannot sell securities short, but money managers at large institutions have an opportunity to capitalize off inefficiencies between various long/short positions. Thus, they are the leading market-neutral practitioners.

Market-neutral strategies...

About the Author

Joseph G. Nicholas is an expert on alternative investment strategies. He is the founder and chairman of Hedge Fund Research LLP, an investment advisory firm, and Hedge Fund Research Inc., a supplier of hedge fund data. He co-founded the Zurich HFR Index Funds. He is the author of Investing in Hedge Funds: Strategies for the New Marketplace.

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