Time to go market neutral: Zenith

Yasmine Raso

Senior Journalist, Financial Newswire

23 June 2023

New research conducted by Zenith Investment Partners has found market neutral strategies to be a good investment alternative as investors navigate volatile equity markets.

Senior Investment Analyst, Jock Allen, said market neutral strategies provide a welcome substitute as investment managers struggle to determine where to invest their clients’ money with “equities going up, down and sideways”.

“Market neutral strategies are a good alternative in this environment. They can deliver absolute returns that are uncorrelated to the broader equity market returns,” he said.

“Unlike traditional equity investments, market neutral managers hold offsetting long and short positions, resulting in a portfolio with limited equity market risk exposure and returns predominantly driven by stock-specific risk.”

However, Allen warned investors that the approaches taken by market neutral managers can be quite different.

The research conducted by Zenith categorised rated market neutral funds into stable, balanced and return seeking based on their risk and return characteristics, and showed that risk levels rose progressively across the three categories with each presenting a “markedly different” risk and return profile.

“The approaches undertaken by market neutral managers can vary significantly and lead to drastically different exposures along the risk/return spectrum,” Allen said.

“In classifying the products into these categories, we considered the typical leverage employed, realised volatility, and the historical ability to protect capital.”

While the research found all three categories showed “significant” and “broadly consistent” volatility reduction” when compared to the S&P/ASX 300 Index, Allen said the market neutral strategies also successfully protected investor capital against declining markets.

“The stable category protected capital most effectively, while the return-seeking funds experienced larger relative drawdowns,” he said.

“Our analysis is clear. Despite increasing market volatility, Zenith rated market neutral strategies offer investors a compelling avenue for attractive and uncorrelated returns.”