CFA Level I · CFA Level I Exam · Hedge Funds
A hedge fund buys undervalued stocks and sells short overvalued stocks within the same sector. It keeps dollar long exposure roughly equal to dollar short exposure so that overall market exposure is close to zero. This strategy is best described as:
The strategy is equity market neutral. It pairs long positions in undervalued stocks with short positions in overvalued stocks of roughly equal dollar size, which removes most market exposure so that returns depend on stock selection rather than the market's direction.
- Aequity market neutralCorrect
- Ba short-bias strategy
- Can emerging markets strategy
Explanation
Holding long and short positions of about equal dollar size to remove broad market exposure defines equity market neutral. A short-bias fund keeps a net short position. An emerging markets strategy is defined by geography, not by offsetting exposure.
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