Market neutral refers to an investing strategy that seeks to generate similar returns regardless of the market climate.
How Does Market Neutral Work?
An investor or fund manager takes a market neutral position by obtaining both long and short positions in carefully chosen securities. This has the effect of tempering or neutralizing gains from price increases while alleviating or even eliminating losses from price declines.
Why Does Market Neutral Matter?
A market neutral strategy is good for risk-averse investors who wish to invest in stocks. Despite the benefits of a market neutral portfolio during a market downturn, the combination of long and short positions inhibits the full extent of gains on stocks during a substantial upward trend.