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Market Neutral Strategies

Copyright © 2005

Bruce I. Jacobs and Kenneth N. Levy, Editors

With a Foreword by Mark Anson, Ph.D.,
 Chief Investment Officer, CalPERS


Market neutral strategies have gained attention in recent years for their potential to deliver positive returns regardless of the underlying market's direction. As the co-founders and principals of Jacobs Levy Equity Management, Bruce Jacobs and Ken Levy have been designing, managing, and writing about market neutral equity strategies since 1990. Market Neutral Strategies provides a forum in which they and some of the industry's other leading market neutral practitioners discuss the implementation, the benefits, and the risks of market neutral investing.

In general, market neutral strategies seek to profit from detecting perceived mispricings in individual securities and constructing portfolios that deliver the excess return (and risk) associated with those securities, regardless of underlying market moves. Market neutral investing employs the same instruments as more conventional strategies, although it tends to be more dependent on derivatives. Market neutral investing also exploits the same methods as more conventional active strategies, including in-depth fundamental analysis, technical approaches, and quantitative techniques. Market neutral strategies have the same basic aim as more conventional active strategies: to buy low and sell high. In more traditional approaches, however, the buying and selling are sequential events, whereas in market neutral they are more often concurrent.

Market Neutral Strategies discusses long-short equity portfolios, convertible bond hedging, merger and mortgage arbitrage, and sovereign fixed-income arbitrage. Additional chapters cover the tax implications of market neutral investing for taxable and tax-exempt investors; the "transportation" of alpha from a particular market neutral strategy to other asset classes; and the failure of two notorious "market neutral" hedge funds, Askin Capital Management and Long-Term Capital Management.

  Jacobs Levy Equity Management. All rights reserved.