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Market-neutral Investing: Putting the 'Hedge' in Hedge Fund
Summary
We compare market-neutral hedge fund investments to traditional long-only active management and find that, under certain common assumptions, adding a market-neutral investment can substantially improve a portfolio's overall risk-return tradeoff. In fact, investors who own traditional actively managed long-only portfolios may be acting inconsistently by not investing in market-neutral hedge funds! We evaluate the merits of some common criticisms of market-neutral investments. These criticisms include the reliance of hedged investing on manager investment skill, the perception that these funds charge very high fees, and the additional necessary skills and risks that come with market-neutral investing. We find, perhaps controversially, that market-neutral hedge fund fees are significantly more reasonable than they first appear. Importantly, investing in a combination of index funds and market-neutral hedge funds breaks the tie-in sale of traditional active management, and allows a reasoned focus on both investment skill and the fees paid for such skill.
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Market-neutral Investing: Putting the Hedge in Hedge Fund
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