Market Neutral strategy

[hsuwang]

Hello David,

On page 9 of the John Hull's text, it says "market neutral: purchase securities considered to be overvalued and sell securities considered to be undervalued in such a way that the exposure to the overall direction of the market is zero."

This somehow look wrong to me because why would anybody wants to buy overvalued securities and sell undervalued securities? If it is overvalued, it means the security is being over priced, and under priced for undervalued securities. Buying overvalued while selling undervalued looks like a lost on both.

Thanks.

 

[David Harper CFA FRM]

Hi Jack,

You must have spotted a typo that they corrected in subsequent print (happens a lot IMO) : my print of 7th edition says "“market neutral: purchase securities considered to be undervalued and sell securities considered to be overvalued in such a way that the exposure to the overall direction of the market is zero.” Really admirable attention to detail, your are walking the talk!

btw, the assigned Level II Jaeger (58. Lars Jaeger, Through the Alpha Smoke Screens: A Guide to Hedge Fund Returns, Chapter 5 – Individual Hedge Fund Strategies) is much more specific about meaning of market-neutral (consistent with this factor exposure concept in Grinold, where strategies are exposed to common "beta factors" and the market neutral is seeking to have zero beta exposures).

Thanks sincerely for sharing your good finds!

David