Isaac Cockfield
The CFO
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Zack started in the financial services industry in 1999 at Merrill Lynch and has worked with many of the same clients for 20 plus years. In 2003, Zack earned the Certified Financial Planner® designation and can meet over Zoom to do an intro meeting.
Equity Market Neutral in 2024
With additional content provided by Michael McClain, AVP, Research.
As we enter the final weeks of 2024, one of the strongest alternative investment strategies this year has been equity market neutral investing. Through the end of November, the HFRI Equity Market Neutral Index has gained 10.2%, with a beta to the S&P 500 of only 0.04. As compared to the rest of the alternative investment sub-strategies, only the HFRI Equity Hedge Index has performed better, albeit this index has a consistently higher beta profile which is especially valuable when the broader market is up over 25% on the year.
HFRI Sub-Strategy Returns Through 11/30/2024
Source: LPL Financial Research, FactSet, 12/16/2024
For more information on the HFRI indexes: https://www.hfr.com/family-indices/hfri/
Strategy Background
Market neutral strategies are designed to generate returns by exploiting pricing inefficiencies while also minimizing exposure to overall market movements. This involves a portfolio manager taking both a long (buy) and short (sell) position in different securities. The offsetting positions may involve pairs trading in similar securities or, more often today, going long securities exposed to positive long-term factors such as value, quality, or momentum to name a few. Short positions are then initiated in securities with limited exposure to these long-term factor premiums. Regardless, the goal is to profit from the price differences between securities, regardless of whether or not the market is up or down, as these strategies will have equal levels of long and short positioning. Many funds are also sector and industry neutral, meaning long and short exposure is balanced across sectors and industries to avoid sector-specific risk.
Often driving performance in the industry is the level of dispersion within and between sectors. Higher levels of dispersion provide greater alpha opportunities from long and short stock selection and can also improve the benefits of diversification. In contrast, when stocks within a sector are moving more closely together, the ability to profit from both long and short positions is reduced, as one side of your exposure will be moving against the current market direction. To put dispersion into perspective, while the information technology sector is up 40.8% through December 16 of this year, the top performing stock is up over 300%, and the worst performer has declined over 59%. A performance spread within a sector of over 350% creates a ripe opportunity for long and short positions, which many strategies have capitalized on this year.
Summary
While 2024 has been an exceptionally strong year for equity market neutral investing, we can see in the chart below that the industry has faced stretches of difficulty over the past 10 years. Much of this was due to lower levels of volatility and stock dispersion, combined with interest rates at all-time lows. However, looking ahead, we’ve become more constructive on the space, as interest rates appear to be leveling off at a higher-than-expected level, while President-elect Donald Trump’s policies may also lead to increased market volatility and stock dispersion. As market participants digest changes and subsequently begin to distinguish between firms positively and negatively impacted, strong fundamental equity market neutral stock pickers may become increasingly attractive.
Historical HFRI Returns
Source: LPL Financial Research, FactSet 12/16/2024 V
For more information on the HFRI indexes: https://www.hfr.com/family-indices/hfri/
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #672306
Jina Yoon
Jina Yoon is LPL Financial’s Chief Alternative Investment Strategist. Her investment career includes over 15 years of experience.
