Market Neutral
There is no better visual description of Market Neutral than this generic internet picture of rocks lying in perfect equilibrium on planks.
To draw even more attention to the message behind this balancing act: it is executed with non standardised components, and set up within a temperamental environment.
While quite simple conceptually, Market Neutral is at heart delicate mathematical acrobatics that requires the “artist” to understand the mechanics of every single component in order to achieve the desired outcome.
The use of the word artist is deliberate as the construction of such strategies requires both creativity and diligence located on the artistic spectrum of professionalism.
The Mantra
As part of the building process, I abide by a very specific mantra which likely differs from most generic definition of market neutral that you can find on the internet.
You could say that the causal being of this mantra stems from being constantly immersed in the raging waters of the industry which forces you to evolve defensive and adaptive mechanisms.
Quantify the yield in its principal dimensions. (quantum, relative value, time, etc…)
Stabilise the market volatility.
Identify and create strategy circuit breakers.
Anyone going down that that rabbit hole should have their own set of rules, or totem to make sure they are not blinded by the yield.
Market Neutral-ish
With so many unquantifiable parameters and camouflaged hostile vectors lurking around, pure Market Neutrality is quite a difficult state to achieve.
This is why I am introducing the concept of Market Neutral-ish as a primer to the Market Neutral mantra.
Market Neutral-ish is an expansion on the principles of Bayesian inference that adds a layer of probabilistic inference in order to better size the risk adjusted returns.
Though this seems a bit contradictory to the whole principle of Market Neutral, it is the closest to the sun that we can fly to without losing our wings.