As pension funds consider adding hedge funds to their portfolios, market-neutral strategies are increasingly popular due to the underlying investment logic. But even if the strategy sounds simple, getting to grips with each manager's proprietary definition of 'market neutral' can be confusing. This is not helped by the fact that opinion is divided on whether market neutral even qualifies as a hedge fund strategy.
Giovanni Beliossi, senior quantitative analyst at First Quadrant in London, explains that one of the reasons why market neutral is a hedge fund strategy is that it requires a different skill set from that used to run a traditional long-only portfolio. He believes that the reason why the divide is unclear to some is that investors recognise that active traditional portfolios have an implicit long/short portfolio in them.