Abstract
It is not obvious why trading over short time horizons should have a different return profile than those of more leisurely strategies applied to the same instruments. But the distinctiveness of directional high-frequency trading strategies is apparent when it is recognized that the source of their returns differs from that of longer-term strategies. Given sufficient diversification, high-frequency funds offer a more-effective form of market neutrality than is achievable by most market-neutral strategies. This conclusion is not always apparent to investors faced with a proposal to invest in a high-frequency fund, not least because of the paucity of data on high-frequency trading in general. This article seeks to establish a systematic explanation of why this should be so, although it is unable to offer statistical confirmation. However, the article notes that there is little that distinguishes high-frequency arbitrage from longer-horizon trades of that type.
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