A hedge fund employing a long/short equity strategy is observing a Canadian technology company (Company X) that it believes is undervalued at its current share price of $50, and another Canadian competitor (Company Y) that it believes is overvalued at $80. The fund buys 10,000 shares of Company X and short sells 6,250 shares of Company Y. What is the approximate net market exposure of this hedge fund strategy?

Question: A hedge fund employing a long/short equity strategy is observing a Canadian technology company (Company X) that it believes is undervalued at its current share price of $50, and another Canadian competitor (Company Y) that it believes is overvalued at $80. The fund buys 10,000 shares of Company X and short sells 6,250 shares of Company Y. What is the approximate net market exposure of this hedge fund strategy?

Answer options:

• Approximately 20% net long
• Approximately 20% net short ✅ Market neutral
• Unable to determine without market beta

Correct answer: Market neutral

Explanation: The fund is buying $50 * 10,000 = $500,000 worth of Company X and short selling $80 * 6,250 = $500,000 worth of Company Y. Since the long and short positions are equal in dollar value, the strategy is market neutral. This reflects a typical goal of many long/short equity funds to minimize market risk.