Market neutrality is a fundamental risk management concept. The idea is simple - minimize the market's impact on the bottom line. To implement a  market-neutral strategy, hedgers need to measure and manage their exposure to the market. While a challenging task, it is usually less complicated than accurately guessing where the market is going.

Market neutrality stems from hedgers’ humble view that they don't have an edge in outguessing the market. Further, market-neutral hedgers tend to assume the market is mostly random and unpredictable. Strangely, given these assumptions, hedgers can develop strategies that create less uncertainty for their bottom lines while benefiting from volatile markets. Market neutrality is a concept at the backbone of our Quartzite Precision Marketing strategy for grain and soybean producers.

There are two main benefits to treating the market as random and unpredictable.  First, market neutrality mostly relieves hedgers from the problematic task of trying to outguess the market. Without that burden, hedgers can focus on measuring and managing risk. Second, since market-neutral hedgers try to have no opinion about market direction, they can separate their emotions from the decision making process. The value of these benefits is substantial. Instead of worrying about being right or wrong, market-neutral hedgers can view the markets impartially and make hedging decisions based on available information.

Of course, market neutrality isn’t a silver bullet. A well-designed market-neutral risk management strategy should reduce a hedger’s overall variation in returns, good and bad. In exchange for protecting downside risk, hedgers reduce upside potential. This tradeoff should be somewhat intuitive. In an earlier article, we discuss why managing risk makes sense, especially when keeping that exposure doesn’t yield the hedger any edge in the marketplace.

At Quartzite Risk Management LLC, we focus on managing risk for our customers in a market-neutral way. We think the purpose of risk management should be to reduce overall variations in returns. We believe the best way to do that is to reduce the market’s impact on overall revenues. That is why we work with our customers to create strategies that make sense for their operations. Market-neutral risk management is not for everyone. Some people enjoy trying to outguess the market and believe they can be successful in that endeavor. We think a market-neutral approach is worth considering for those who prefer to minimize the market’s impact on their bottom line. If you’re interested in learning more, take a look at the educational resources on our website, or contact us to discuss if a market-neutral approach is right for you.