Long/Short Equity – Market Neutral
This video demonstrates a simple illustrative example of a Long/Short Equity Market Neutral alternative strategy.
A long-short manager starts with $100 and believes that 2 stocks will have performance that differs significantly from the market. Stock A is expected to increase in price, and Stock B is expected to decrease in price. So the manager borrows $100 worth of Stock B and sells it in the market. The manager receives $100 on the short selling trade and now has $200 to invest. The manager invests the $100 in Stock A and the other $100 in T-bills. Now the fund has $100 long equity, $100 short equity, and $100 T-bills. The strategy is called Market Neutral (100/100) which has $200 exposure to the stock trade ideas, and a total net long exposure of $0 (long minus short), while it still keeps its alpha potential from the long and short positions.