Investment Strategy in a Down Market: Application of Market Neutral Strategy in Energy, Utilities and Technology Sector

Abstract

In face of the challenges of Covid-19, the Europe energy crisis, and inflation, the US stock market entered a bear market period in 2022. During a down market period, market neutral strategy is widely preferred, since it can minimize market risks by constructing a zero-beta portfolio. This paper analyzes the effectiveness of the market neutral strategy in practice. Three portfolios, that simulate different levels of stock selection skills, are set up from August 15, 2022, to September 9, 2022, when the market is sinking. The returns of the portfolios deliver three messages. First of all, market neutral strategy can outperform the downward market, regardless of stock selection abilities, but it does not guarantee returns higher than the risk-free rate, which the strategy thoracically intends. Secondly, higher stock selection skills may create higher returns. An investor, who is excel at analyzing both industry and stock, performs better than an investor who is adept at a single aspect. Lastly, the choice of stocks is more important than the choice of industries. If a portfolio is well diversified based on stocks’ values, it can still generate a decent return even if the industry is underperformed.