DEFINITION of 'Cash Neutral'

An investment strategy strategy that requires no net cash in order to enter perform the transaction. In general, cash neutral strategies require simultaneous buying and (short) selling of instruments. These strategies are popular with hedge funds, since they do not require money to be tied up in order to earn returns.

BREAKING DOWN 'Cash Neutral'

The most common cash neutral technique is the "market neutral" strategy. In this strategy, overvalued instruments are sold short while undervalued instruments are bought. Investable funds are split approximately 50% into short selling and buying so that, all else being equal, the portfolio value should not fluctuate based on overall market movements. Since investable funds are split equally, the cash provided from short selling offsets the cash required to buy instruments. Thus, there is no net cash flow from this initiating this strategy.

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