Sectorneutral

Sectorneutral refers to an investment approach that seeks to remove or minimize exposure to sector movements in a portfolio. In practice, a sector-neutral portfolio aims to have net zero or near-zero sensitivity to the performance of broad industry sectors, so that returns are driven primarily by stock-specific factors or alpha.

Implementation typically involves balancing long and short positions across sectors. This can include taking long positions in undervalued stocks within certain sectors while shorting overvalued stocks in other sectors, or hedging sector risk with sector index futures or swaps. Portfolios are usually rebalanced periodically.

Sector classifications vary by data provider, and misclassification can leave residual exposure. Sector-neutral approaches reduce systematic sector risk but do not eliminate all risk, including beta, liquidity, or idiosyncratic risks.

Applications include hedge funds and quantitative managers seeking to isolate stock-specific alpha, and in some cases sector-neutral indices or ETFs. The strategy is often contrasted with market-neutral approaches that aim to remove broad market risk as well.

Challenges include higher transaction costs from frequent rebalancing and short selling, liquidity constraints, model risk, and potential crowding as many managers pursue similar ideas. Satisfactory performance depends on accurate sector classification and timely hedging.