Beta Neutral Allocation – How It Works in Fincanva

What It Is

Beta Neutral allocation is a strategy that aims to eliminate exposure to overall market movements by achieving a portfolio with a net beta of zero. This means that the performance of the strategy is not correlated with the broader market. It typically involves combining long positions in assets with lower beta and short positions in assets with higher beta.

What It Does in Fincanva

• Logic: Weights are calculated so that the combined beta of all selected assets equals zero (or a custom target beta if set in future updates)

• Simulation Behavior: Positions are rebalanced to ensure the net beta remains neutral over time

• Rebalancing Effect: Regular rebalancing is crucial to maintain neutrality as betas evolve with market conditions

• Special Feature: Enables short positions, making it one of the few allocation types that includes negative weights

Pros

• Minimizes exposure to overall market risk

• Suitable for market-neutral or absolute return strategies

• Helps isolate asset-specific alpha regardless of market direction

• Common in hedge fund and quantitative trading strategies

Cons

• Requires reliable beta estimates and may be sensitive to their accuracy

• Involves short selling, which can increase complexity and costs

• Frequent rebalancing may lead to higher transaction costs

• May underperform during strong bull markets due to neutralized market exposure

Where You Can Use It

• Portfolios: Not available

• Models: Yes

When to Use It

• Best for market-neutral strategies or when trying to isolate alpha from beta

• Suitable in volatile or unpredictable markets where direction is unclear

• Useful for constructing hedged strategies or pair trades

• Ideal when aiming for absolute returns regardless of macro trends

Example
Imagine a model includes two assets:

Asset A has a beta of 1.5
Asset B has a beta of -0.5

To achieve a net beta of 0, the allocation would overweight Asset B’s short exposure relative to Asset A’s long exposure, adjusting weights until the total weighted beta contribution sums to zero.

• Models: Available on Ultimate and Professional plans

• Portfolios: Not available