Market Neutral

Search Dictionary

Definition of 'Market Neutral'

Market neutral is a term used to describe an investment strategy that seeks to minimize or eliminate market risk. This can be done by investing in a variety of assets, including stocks, bonds, and commodities, in such a way that the portfolio's overall performance is not correlated to the performance of any particular market index.

There are a number of different ways to implement a market-neutral strategy. One common approach is to use a long-short equity strategy, which involves buying some stocks and selling short others. This way, the portfolio is not exposed to the overall direction of the market, as any gains from the long positions will be offset by losses from the short positions.

Another approach to market neutrality is to use a pairs trading strategy. This involves identifying two stocks that are closely correlated, and then trading between them in an attempt to profit from the difference in their prices.

Market-neutral strategies can be used by both individual investors and institutional investors. They can be a good way to reduce risk and generate consistent returns, but they do not come without risk. For example, market-neutral strategies can be complex and difficult to implement, and they can also be expensive to manage.

In addition, market-neutral strategies can be subject to a number of risks, including liquidity risk, counterparty risk, and operational risk. Liquidity risk is the risk that an investor may not be able to sell their positions quickly or at a fair price. Counterparty risk is the risk that the counterparty to a trade will default on their obligations. Operational risk is the risk of errors or fraud in the management of a market-neutral strategy.

Despite these risks, market-neutral strategies can be a valuable tool for investors who are looking to reduce risk and generate consistent returns. However, it is important to understand the risks involved before investing in any market-neutral strategy.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.