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ABSTRACT
The objective of this paper is to examine whether Market Neutral hedge funds strategies are exposed to the equity market or if they are in fact Market Neutral. Using two main database hedge funds indexes, EDHEC and CSFB Tremont, and contrasting them to the MSCI World Index, from January 1998 to December 2008, we performed a comparative analysis on the most representative Market Neutral hedge funds strategies. We examine for its neutrality and analyze what kind of strategies consistently perform differently over time, considering four strategies of Market Neutral hedge funds. The results, based on monthly returns, suggest that neutrality in the so-called arbitrage and pure alpha strategies do not perform differently from the traditional capital market, leading to the conclusion that neutrality in hedge funds, given their investment characteristics, is not as accurate as one may suppose. In such a context, mutual funds' managers should be aware of their hedge funds picking strategies when diversifying portfolios based on the neutrality of these hedge funds.
Keywords: hedge funds, market neutral strategies, hedging.
JEL classification: G11; G12; G15.
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I. INTRODUCTION
Hedge funds are alternative investment vehicles that share a series of special characteristics, when regarding the traditional investment. Hedge funds are actively managed, with flexible investment policies, provide limited liquidity in general, are often accused of lack of transparency, target a specific type of investors and all this is due to a relatively freedom from regulatory controls.
Regarding some of their characteristic mentioned, an active management and flexible investment policies, the industry of hedge funds has been somehow misunderstood by the investors and regulators. The lack of transparency, due not only to the fact that they are not allow to advertise and solicit investors, but also to their exemption to provide regular information, is actually becoming a major concern of the global players in this industry. The main difficulty regards the biases that such vehicles suffer, in a direct consequence of their freedom of action.
Recently, major databases, such as EDHEC and CSFB/TREMONT, started publishing alternative Indexes, including different styles of strategies. With the access to this information, some important studies have been published.
Over the past fifteen years, the study of hedge funds strategies increased. More recently,...