What is Market Neutral?

Market-neutral strategy refers to constructing long and short positions at the same time to hedge market risks and obtain stable returns under any market environment. Stock market neutral strategies include statistical arbitrage and fundamental arbitrage.

Market-neutral strategy

Statistical arbitrage is a model-based short-term

Compared with other types of hedge funds, stock market neutral strategies do not perform well in a bull market, but in a bear market, market neutrality shows a higher advantage and far outperforms other types of hedge funds. In the long run, the return on the neutral strategy of the stock market is equivalent to that of the stock index, and the volatility is similar to that of the bond index, but the risk-adjusted return level is much higher than the stock and bond index.

The stock market neutral strategy relies on stock selection ability to make money, and its core is the stock selection ability of investors. The overall goal is that regardless of the market trend, the performance of portfolio longs is always better than short. Specifically, the gains of the stock market's neutral strategy come from three sources: the longs of the portfolio, the shorts of the portfolio, and the cash flow generated by short-selling stocks.

The advantage of the neutral strategy of the stock market is that it can obtain double alpha, no weight limit for portfolio construction, and low volatility; its risks include stock selection capabilities, model risks, adjustment risks, short selling risks, and long and short positions Does not match.

Based on the statistical arbitrage of paired transactions, the basic idea is that the average value is returned, and the average value is generated due to overreaction in the market: a stock has a short-term overvaluation (undervaluation) relative to comparable other company stocks or indexes By building pairs, you can take advantage of this short-term pricing bias.

By constructing a statistical arbitrage model, we can calculate a signal index to capture statistical arbitrage opportunities that appear in the market. When the signal index exceeds our set threshold, you can use paired transactions for statistical arbitrage.

The arbitrage simulation results of the single-pair stock portfolio statistics of the banking industry show that Huaxia Bank-Minsheng Bank paired stocks issued a total of 4 arbitrage trading signals during April 2007-April 2007, with a cumulative initial capital gain of RMB 0.3033 million. Annual yield is 30.33%.

The domestic market arbitrage simulation results of multiple pairs of stock portfolios show that the annual rate of return for paired statistical arbitrage transactions is 27.45%. The correlation between the paired trading portfolio trend and the overall market is lower, and the returns are more stable. During the period from April 2007 to April 2007, the standard deviation of the daily rate of return of the paired stock portfolio was 0.47%, and the correlation coefficient with the daily rate of return of the Shanghai Stock A Index was 0.109.