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Hedge Fund Strategies (Part 4) –Hedged Equity Market Neutral

Hedge Fund Strategies (Part 4) –Hedged Equity Market Neutral

Traders take positions in pairs of similar stocks, longing the “undervalued” one and shorting the “overvalued one”, thereby placing a bet on the ultimate outperformance of the long position.

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Copyright 2011 Eric Bank, Freelance Writer
Beta

Beta

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Hedge funds use an array of strategies to guide trading.  Most of these strategies seek to decouple returns from those of the overall market, as measured by a statistic called “beta” (β). Beta is calculated by dividing the covariance of an investment’s return by the variance of a portfolio or market return:

βi = Cov (ri, rm) / Var(rm) where i = an investment, m = market portfolio, and r = return

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Copyright 2010 Eric Bank, Freelance Writer