What are Equity Market Neutral Strategies?
Remember, equity usually refers to stocks. Market-neutral means your portfolio entirely avoid some form of market risk, typically done through hedging (offsetting risk in one investment by another investment). So, equity market neutral strategies are investing strategies that seeks to exploit investment opportunities unique to some specific group of stocks while maintaining a neutral exposure to broad groups of stocks defined, for example, by sector, industry, market capitalization, country, or region.
The strategy holds long/short equity positions, with long positions hedged with short positions in the same and related sectors, so that the equity-market-neutral investor should be little affected by sector-wide events. This places, in essence, a bet that the long positions will outperform their sectors (or the short positions will underperform) regardless of the strength of the sectors. Equity-market-neutral strategy occupies a distinct place in investing strategies as having one of the lowest correlations with other investing strategies.
Why You Care
This is the ultimate strategy for stock pickers, because stock picking is all that counts. For example, a hedge fund manager will buy long the 10 biotech stocks that should outperform and sell short the 10 biotech stocks that should underperform. Therefore, what the actual market does won't matter (much) because the gains and losses will offset each other. If the sector moves in one direction or the other, a gain on the long stock is offset by a loss on the short.