In a market shaped by passive flows, valuation dispersion, policy uncertainty and episodic volatility, at Candriam we believe Equity Market Neutral strategies can offer investors a differentiated source of potential return and portfolio diversification.
By Celia Fseil and Ludovic Fidelle
A market shaped by flows, not fundamentals alone
Equity markets are increasingly driven by flows. The continued expansion of passive investing has transformed how capital moves through markets, with index-tracking strategies now representing a dominant force in global equities.
This structural shift has brought clear benefits in terms of cost and accessibility. But it has also introduced new dynamics. When large volumes of capital are deployed mechanicallyto track index changes – additions, deletions and weight changes - — prices do not always fully reflect underlying fundamentals in the short term.
For investors, this matters. It means that beneath headline index performance, there are often significant dislocations between securities, sectors and themes. At Candriam, we believe these inefficiencies are becoming more frequent and more pronounced as passive flows continue to grow.
”When large volumes of capital are deployed mechanically, prices do not always fully reflect underlying fundamentals in the short term.
Why now: a supportive opportunity set
The current environment brings together several conditions that are particularly supportive for equity market neutral strategies.
Impact of Passive
Investing
Passive investing continues to reshape today’s market environment,
with record inflows into index-tracking strategies increasing the scale of mechanical trading linked to additions, deletions, reweightings and methodology changes. In periods of elevated volatility and concentrated market leadership, these flows can amplify short-term pricing dislocations that may not always reflect underlying fundamentals. For equity market neutral strategies, this creates a broader and more dynamic opportunity set.
Elevated Valuation Dispersion
At the same time, valuation dispersion remains elevated. Although some of the extremes observed at the end of 2024 have moderated, the gap between the most expensive and cheapest segments of the market is still high relative to historical levels. This creates a favourable backdrop for relative value investing, where performance is driven by the normalisation of these spreads rather than by the overall direction of markets.
Uncertain Macro Environment
Overlaying this is a more uncertain macroeconomic and geopolitical environment. Shifting monetary policy expectations, geopolitical tensions and evolving narratives around themes such as artificial intelligence have led to episodes of volatility and rapid factor rotations. These dynamics can amplify short-term dislocations within markets—dislocations that are less relevant for long-only investors but can be actively targeted within a market neutral framework.
Taken together, these elements point to a market where opportunity is increasingly found in relative pricing rather than directional moves.
Capturing inefficiencies through a two-engine approach
Candriam’s Equity Market Neutral strategy is designed to capture these opportunities through two complementary performance engines: relative value and index rebalancing.
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The relative value component focuses on identifying mispricing between securities, typically expressed through long and short positions in stocks with differing valuation profiles. In an environment of elevated dispersion, this approach aims to benefit from the normalisation of spreads over time. |
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Why Candriam: experience in a specialised space
Equity market neutral is a specialised area that requires both technical expertise and disciplined risk management. At Candriam, we believe our experience in this space is a key differentiator.
The firm has been developing and managing equity market neutral and index rebalancing strategies for over two decades. Over this period, the strategy has navigated a wide range of market environments, from low-volatility conditions to periods of stress and dislocation.
Today, the strategy is managed by a dedicated team of four specialists combining expertise in quantitative research, index-related opportunities and portfolio construction. This combination allows for both systematic analysis and discretionary oversight — an important feature when navigating complex and evolving market dynamics.
The investment process is supported by continuous research and refinement. As market structure evolves — through changes in index methodologies, the growth of ETFs or shifts in liquidity — the team adapts its models and approach to ensure it remains aligned with the opportunity set.
A role within diversified portfolios
As investors reassess portfolio construction in a changing environment, equity market neutral strategies are once again attracting attention.
- Their ability to seek returns with limited dependence on equity market direction can offer diversification benefits alongside traditional asset classes.
- At the same time, the current market structure — shaped by passive flows, valuation dispersion and index-related activity — provides a broad and evolving opportunity set.
At Candriam, we believe this combination makes the case for equity market neutral particularly compelling today. By focusing on inefficiencies created by the growth of passive management, rather than relying on directional views, the strategy is designed to access a different — and increasingly relevant — source of return.