An Empirical Evaluation of the Return and Risk Neutrality of Market Neutral Hedge Funds

Abstract

Market neutral is a widely-used investment style for hedge funds. By analysing a data set consisting of 7913 hedge funds, we assess their historical ability to stay neutral towards the U.S. equity market in terms of return and return volatility. The chosen hedge fund strategies either claims to invest in a market neutral style, or have the ability to do so. During times of both normal and abnormal market volatility, we find significant evidence against market neutrality in terms of returns and/or return volatility for all the chosen strategies.