Equity Market Neutral Investing, Part II: What’s Neutral?

A market neutral strategy is designed to provide equal investment on long (buy in anticipation of an increase in value) and short (sell to capitalize on falling prices) transactions. The transactions are “neutral” by not favoring long or short positions. Other strategies may have unequal sums invested in long and short positions, and the resulting returns may be more correlated to (and closely follow) equity markets.

When we hold equal positions in companies from similar industries, we buy the company we view as more attractively valued and sell the other company that we see as less attractive. The goal is that the company we buy performs better than the company we sell, and that the gap or spread between their performance results in a positive return.

Summary

  • Investment dollar neutral; equal investments in long and short positions
  • Goal is that “gap” between buy and sell produces a positive return
  • Uncorrelated from equity and bond markets and acts as an alternative type of investment

Next week: Equity Market Neutral Investing, Part III: How It Works.

Diversification does not assure a profit nor does it protect against loss of principal.

The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments® portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.