Where does market neutral equity fit into your Portfolio?Traditional asset allocation practice divides investment portfolio assets among three major asset classes: cash, fixed income and equities. Alternative Investments, the fourth asset class, is made up of real estate, private equity, venture capital and hedge funds. Market neutral investing is one of the most conservative strategies within the hedge fund universe. While the term "hedge fund" has been adopted as a catch-all to describe any fund product that does not simply buy-and-hold stocks and bonds, in fact, there exists a vast variety of hedge fund strategies. These strategies result in a risk spectrum that ranges from high risk to very conservative. The risk level of a market neutral strategy is relatively equal to the risk of an average Canadian dividend mutual fund. In other words, quite low. Unlike many hedge fund strategies that do not necessarily hedge away risk (many leverage risk up!), effective risk hedging is a key component of market neutral equity investing. Adding elements of Alternative Investments, including market neutral funds, to a portfolio already diversified by cash, fixed income and equities is a very effective method of achieving further diversification. |
