Hacker News Reader

Comment by hendzen | Hacker News Reader

Many (if not most) quantitative hedge funds are dollar neutral, which means they have one dollar short for every dollar long. There are typically additional constraints about having equal long/short exposure on each industry and investing style (momentum, value, etc).

So contrary to the article, most of these funds don’t take broad bets for or against the market. What they are really doing is correcting the relative valuations of each individual company by shifting bits of capital away from overpriced companies and towards underpriced ones. That doesn’t have the effect of raising or lowering broad market indices.

Now there are of course other investors who take broad directional bets on the market but those are probably more likely to be discretionary bets rather than systematic.

View on HN

> Many (if not most) quantitative hedge funds are dollar neutral

Delta neutral. And this is very difficult (and expensive) to attain in real life. Most funds are long biased because it's cheaper to be long than short.

No - dollar neutral. Delta neutral is an entirely separate concept. I'm talking about equities trading (or potentially total return swaps) not options or other derivatives.

Why do you think its so difficult and expensive to attain? What do you think institutional borrow costs are? And I'm not talking about Interactive Brokers... I'd wager that most funds are long biased because its more difficult to generate short alpha - not because of the costs of portfolio construction.

Stock borrow is expensive. More problematically, dollar neutral doesn’t necessarily mean beta neutral (which is the same thing as delta neutral with respect to a broad-market index).

Sure, I alluded to the concept of beta neutral when I mentioned 'additional constraints' - dollar neutral was a simpler concept I used for a non-finance audience. I've never heard anybody use the term delta neutral outside of derivatives trading.

For the vast majority of symbols, stock borrow is cheap at institutional size.

> For the vast majority of symbols, stock borrow is cheap at institutional size

Stock borrow costs vary from symbol to symbol. The ones you want tend to be the ones you pay for. Moreover, cheap doesn't mean free. Shorting half of one's portfolio is rancidity expensive compared to buying some puts. Even that is pretty expensive for total hedging purposes.

At the end of the day, most long-short funds are not market neutral. The ones that are operate on minuscule time horizons, and are better categorized as shadow market makers than funds. (Both in their operation and fundraising mechanics, the short-term traders tending to be more likely to deploy permanent--versus limited--capital.)

How does that not result in a net neutral investment return? Forgive my ignorance if this answer is obvious

The goal is to have zero correlation to the index (called beta). You’re hoping that your long assets will go up in value regardless of what the index is doing (the alpha of the stock). Similarly with your short positions, you’re hoping that they are going to go down regardless of what the index is doing. In a sense you’re eliminating “chance” by driving the beta close to zero and instead are focusing more on what actually makes the company a good investment (it’s alpha)

Because your portfolio is neutral in terms of the market/sector, but not on individual options. A good place to start is to read up on statistical arbitrage.

To expand on pmalynin's excellent answer with an example:

Imagine you think Apple is better than any other technology company and you want to bet it will outperform other technology companies. If you simply buy Apple stock, you might lose money even if it outperforms all other tech companies, in the case that the whole market is going down. Because of the above, you need to devise a strategy that will earn you money on the difference between Apple stock and the overall tech sector stocks. Those strategies usually involve combinations of stock and derivatives and you can optimize your returns vs exposure with simple models.

Reply on news.ycombinator.com