DEFINITION of 'Equity Market Neutral'

A hedge fund strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors.

BREAKING DOWN 'Equity Market Neutral'

This is the ultimate strategy for stock pickers, because stock picking is all that counts. For example, a hedge fund manager will go long in the 10 biotech stocks that should outperform and short the 10 biotech stocks that will 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.

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