An [[investment strategy]] or [[Portfolio (finance)|portfolio]] is considered '''market-neutral''' if it seeks to avoid some form of [[market risk]] entirely, typically by [[hedge (finance)|hedging]]. To evaluate market- neutrality requires specifying the risk to avoid. For example, [[convertible arbitrage]] attempts to fully hedge fluctuations in the price of the underlying [[common stock]]. A portfolio is truly market-neutral if it exhibits zero [[Financial correlation|correlation]] with the unwanted source of risk.<ref>[http://www.hedgefund-index.com/s_equitymn.asp#Are_“Market_Neutral”_Hedge_Funds_Really_Market_Neutral Equity Market Neutral Related Scholarly Compositions]</ref> Market neutrality is an ideal, which is seldom possible in practice.<ref>[http://www.eurekahedge.com/news/06_nov_Stephen_Foerster_Equity_Market_Neutral_HF_Return_Drivers.asp Equity Market Neutral Hedge Fund Return Drivers] {{webarchive|url=https://web.archive.org/web/20100804150347/http://www.eurekahedge.com/news/06_nov_Stephen_Foerster_Equity_Market_Neutral_HF_Return_Drivers.asp |date=2010-08-04 }}</ref> A portfolio that appears market-neutral may exhibit unexpected correlations as market conditions change. The risk of this occurring is called [[basis risk]].
A portfolio is truly market-neutral if it exhibits zero [[Financial correlation|correlation]] with the unwanted source of risk.<ref>[http://www.hedgefund-index.com/s_equitymn.asp#Are_“Market_Neutral”_Hedge_Funds_Really_Market_Neutral Equity Market Neutral Related Scholarly Compositions]</ref> Market neutrality is an ideal, which is seldom possible in practice.<ref>[http://www.eurekahedge.com/news/06_nov_Stephen_Foerster_Equity_Market_Neutral_HF_Return_Drivers.asp Equity Market Neutral Hedge Fund Return Drivers] {{webarchive|url=https://web.archive.org/web/20100804150347/http://www.eurekahedge.com/news/06_nov_Stephen_Foerster_Equity_Market_Neutral_HF_Return_Drivers.asp |date=2010-08-04 }}</ref> A portfolio that appears market-neutral may exhibit unexpected correlations as market conditions change. The risk of this occurring is called [[basis risk]].
==Equity-market-neutral==
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The strategy holds [[long/short equity]] positions, with long positions hedged with short positions in the same and related sectors so that the equity-market-neutral investor should be little affected by sector-wide events. These positions, in essence, a bet that the long positions will outperform their sectors (or the short positions will underperform) regardless of the strength of the sectors. Equity-market-neutral strategy occupies a distinct place in the hedge fund landscape by exhibiting one of the lowest [[Financial correlation|correlations]] with other alternative strategies.
Evaluating the Hedge Fund Research index returns for 28 different strategies from January 2005 to April 2009 showed that equity-market-neutral strategy had the second-lowest correlation with any of the other strategies,{{Citation needed|date=February 2012}} behind only short-bias funds that typically have a negative correlation with all other funds. This result is not surprising given that each fund utilizes the unique insights of a manager, and these insights are not replicated across funds. The low correlation has generally remained a prominent feature of Equity Market Neutral Managers. A continuously updated assessment of the correlation and beta for equity market neutral strategy is maintained by [https://nilssonhedge.com/reports/hedge-fund-correlation-and-beta/ NilssonHedge].
In terms of performance, performance can be tracked in real-time via daily hedge fund indices tracking managers in the style: [https://www.hedgefundresearch.com/indices/hfri-i-liquid-alternative-ucits-eh-equity-market-neutral-index HFRI] and [https://nilssonhedge.com/index/daily-indices/daily-equity-market-neutral-index/ NilssonHedge] are two examples of daily performance trackers.
