Equity Market Neutral Update

  • A relatively buoyant environment for Equity Market Neutral strategies
  • Complementary performance drivers should benefit from this favorable environment


An eventful first half...

During this same period in 2022, we saw strong pressure from the number of investors active in this approach and hence a large number of arbitrage transactions, culminating in the annual reconstitution of the Russell indices .

The situation has gradually improved during subsequent index re-balancings, as competing managers gradually reduced the amounts they allocated to these types of strategies.

The first notable 2023 meeting for index constituents seems to have returned the markets to their norm.

  • In February, German chemicals company Linde exited the European indices (Dax30©, Eurostoxx50© and Stoxx600©) following a change in the German company's domicile to the USA.

As this was an index exit, the natural position to adopt was to go short the stock to benefit from the falling share price. However, on the day of the rebalancing, the stock moved in the opposite direction to that which had been expected.

... which shook up the index arbitrage industry

The impact of Linde's unusual index exit reaction, which was relatively costly for some arbitrageurs, led to the closure of numerous teams within multi-strategy hedge funds, as reported by the press in the weeks that followed[1].

The result was a clear reduction in arbitrage pressure around rebalancing, producing a more favorable environment for those who stayed the course.

Candriam's Equity Market Neutral team is thus emerging from a particularly active period of quarterly rebalancings of most of the world's major equity indices in May and June, which proved profitable for the strategy. We provide a few examples below:



A relatively favorable environment

The table below illustrates the evolution of the environment on Equity Market Neutral strategies over the recent years relative to the environments.


For Index Arbitrage strategies, the attractiveness of the environment can be assessed by the balance between supply from arbitrageurs and demand from index investors at the effective rebalancing date.

When arbitrageur flows are lower than index flows on the effective rebalancing date, the prices of the stocks to be purchased by the indices rise, enabling the arbitrageurs, as liquidity providers, to sell at advantageous levels. A symmetrical phenomenon can be observed in the case of stocks for sale to index investors.

Conversely, when arbitrager flows exceed index flows on the effective rebalancing date, the prices of stocks to be purchased by index investors fall, causing arbitragers to sell at deteriorated levels. In the same way, there is a reciprocal phenomenon for stocks that have to be sold by index investors.

2020 and 2021 were lightly arbitraged years, during which the prices of stocks subject to index events moved in the expected direction, enabling the fund to record two years of double-digit performance.

While the environment in 2022 was unfavorable, we have seen a marked improvement in opportunity since the MSCI indexes were rebalanced on May 31. Index events traded mostly in the direction expected on the days of the MSCI and S&P rebalances, and a little more neutrally on the Russell, which conceded some of its positive performance seen since the announcement.

For Relative Value strategies, the environment remains very favorable: the aim here is to identify market inefficiencies linked to valuation differentials, such as a gap between two stocks that usually behave in a highly correlated way, and to exploit their reversion to the mean. We believe that the number of such inefficiencies could increase as passive management continues to grow in popularity, thus strengthening our range of opportunities


Why consider an Equity Market Neutral investment today?

A number of factors now support our strategy. 

Higher returns on cash :

As a long/short fund, the majority of the fund is invested in money market funds and instruments, enabling a return close to €STR. As a result, we expect our cash portfolio to generate additional returns to those of previous years.

Assuming rates remain at 3.4% for the rest of the year, we expect cash yields for the fund to be around 3%.

Two complementary performance drivers:

As mentioned above, we believe we are entering a period of normalization with a more balanced environment of arbitrageurs on Index Arbitrage strategies, which should enable us to generate more alpha on our opportunities.

The Relative Value strategy should also benefit from an environment where the number of opportunities is growing.



All our investment strategies involve risks, including the risk of loss of capital. The main risks associated with our Equity Market Neutral Equities strategy are: risk of loss of capital, equity risk, financial derivative risk, counterparty risk, arbitrage risk, sustainability risk, currency risk, interest rate risk, credit risk, liquidity risk, volatility risk, emerging market risk, risk of changes to the benchmark index by the index provider, risk of external factors, ESG investment risk, equity class hedging risk (only for hedged classes).

This is a marketing communication. This document is provided for information purposes only and does not constitute an offer to buy or sell financial instruments, nor does it represent an investment recommendation or confirm any kind of transaction. Although Candriam selects carefully the data and sources within this document, errors or omissions cannot be excluded a priori. Candriam cannot be held liable for any direct or indirect losses as a result of the use of this document. The intellectual property rights of Candriam must be respected at all times, contents of this document may not be reproduced without prior written approval.

Warning: Past performance of a given financial instrument or index or an investment service or strategy, or simulations of past performance, or forecasts of future performance does not predict future returns. Gross performances may be impacted by commissions, fees and other expenses. Performances expressed in a currency other than that of the investor's country of residence are subject to exchange rate fluctuations, with a negative or positive impact on gains. If the present document refers to a specific tax treatment, such information depends on the individual situation of each investor and may change.

The risk of loss of the principal is borne by the investor.

Information on sustainability-related aspects: the information on sustainability-related aspects contained in this communication are available on Candriam webpage https://www.candriam.com/en/professional/sfdr/


[1] Sure-Fire Trade Exploiting Dumb Index Cash Crushed by Crowding - Bloomberg News 11/05/2023, 'It can't get much worse than this': A trail of portfolio managers have resigned or been liquidated as the once lush index-rebalance strategy dries up" - Bloomberg News 26/05/2023

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