Abstract
One can consider the concept of market neutrality for hedge funds as having breadth and depth: “breadth” resects the number of market risks to which a fund is neutral, while “depth” resects the “completeness” of the neutrality of the fund to market risks. We focus on market neutrality depth, and propose Þve different neutrality concepts. “Mean neutrality” nests the standard correlation-based deÞnition of neutrality. “Variance neutrality”, “Value-at-Risk neutrality” and “tail neutrality” all relate to the neutrality of the risk of the hedge fund to market risks. Finally, “complete neutrality” corresponds to independence of the fund to market risks. We suggest statistical tests for each neutrality concept, and apply the tests to a combined database of monthly “market neutral” hedge fund returns from the HFR and TASS hedge fund databases. We Þnd that around one-quarter of these funds exhibit some signiÞcant exposure to market risk.
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