“Depth”: reproduces the completeness of the neutrality of
the fund to market risks;
“breadth”: reveals the number of market risks to which
the hedge fund is neutral.
2. Correlation neutrality
An investor facing returns that are multivariate normally
distributed or one with quadratic utility, will only
require linear correlation as the measure of
3. Mean neutrality
Is the expected return on the fund being independent of the
return on the market. Requires not only that there are no
nonlinear relationships, but also that there is no linear
relationship between the market return and the fund return.
4. Variance neutrality
Considering risk as measured by variance, while not constant,
is expected that the risk of the fund does not increase at the
same time as the risk of the market index. That means the
risk of the fund is neutral to market risk.
5. Value-at-risk neutrality
Given that the VaR of a fund is simply a quantile of its
distribution of returns, value-at-risk neutrality implies
that all quantiles of the fund are neutral to the market.
6. Tail neutrality
Implies that conditioning on the fact that an extremely
low return on the market is observed do not affect the
probability of an extremely low return on the fund.
7. Complete neutrality
Requires completely indenpence on the market return
by the distribution of fund returns.
Patton, A. J., 2004, ‘Are “Market Neutral” Hedge
Funds Really Market Neutral?’ London School of
Patton, A. J., 2008, ‘Are “Market Neutral” Hedge
Funds Really Market Neutral?’ Oxford University Press