Targeting market neutrality

Neutralizing portfolios from overall market risk is an important part of investment management, particularly for hedge funds. In this paper we show an economically significant improvement in the accuracy of targeting market neutrality for equity portfolios. Key features of the approach are the relat...

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Bibliographic Details
Published in:Quantitative finance 2019-03, Vol.19 (3), p.437-451
Main Authors: Lee, John B., Reeves, Jonathan J., Tjahja, Alice C., Xie, Xuan
Format: Article
Language:English
Subjects:
Beta
Beta forecasting
Portfolio optimization
Short-horizon forecasting
Systematic risk
Zero-beta portfolios
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Summary:Neutralizing portfolios from overall market risk is an important part of investment management, particularly for hedge funds. In this paper we show an economically significant improvement in the accuracy of targeting market neutrality for equity portfolios. Key features of the approach are the relatively short forecast horizon of one week and forecasting with realized beta estimators computed using high quality, error corrected, intraday returns. We also find that too long and too short estimation windows result in poor beta forecasts and that the optimal length of estimation window depends on the frequency of return observations.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697688.2018.1479066