# market neutral weights and cash values

I am looking at a market neutral portfolio and have a question which I think is probably pretty simple.

So I can see the individual stock weights.

The sum of the longs is 0.83
The sum of the shorts is -0.78


So the net weight is 0.05. The weight of the cash part is 0.95 giving a total weight of 1.

Is this normal for a market neutral or long short portfolio to have that much cash? I'm obviously missing something here.

I also have an addition question. I then see that with these weights they do the following manipulations to get 'fully invested portfolio', (the weights above summed to 1 so not quite following why the below is required).

 someMultiplier = 0.95 / sum of the longs (i.e 0.83)
someMultiplier = 1.144578
wgts = all wgts (excluding cash) * someMultiplier
cash = 1 - wgts


What are they doing here? The cash value is approx 0.94

Yes, it is normal for a L/S fund to have a lot of cash. When you short securities your account is credited with the proceeds from the sales. So if you short 1 million of stock you end up with 1 million cash and -1 million short stock position. Another way to look at it is: as you mentioned, the weights as a fraction of NAV have to add up to 1.0 by definition and cash can be seen as mechanically determined by that identity [i.e. cash=1.0-0.83+0.78].

What the other calculation is about I have NO IDEA. Maybe the "normal" long exposure they want is 0.95 rather than 0.83 and they are trying to adjust for that. Do they mention what they mean by "fully invested"?

Market-neutral portfolios seek to eliminate market risk, so sum of the weights could be even a zero. That would mean that you bought a lot of some equity, and then borrowed some other equity and sold it. You have cash now, but you also have risks, because you will have to return the borrowed equity in the end, and who knows how much you will have to pay to buy it back from the market. So you have twofold price risks. There's a difference between Net Exposure (in your case, it is 0.05) and Gross Exposure (in your case, it is 0.83 + 0.78 = 1.61).

As for the code provided: I think it seeks to keep the balance of longs and shorts, while increasing the long weight to 0.95. At least, that's what it looks like if you consider "wgts" a vector.

Hope that helps!

In addition to the previous comments, I would like to add that are plenty of definitions for market neutrality.

You can for instance be market neutral in dollars, or market neutral in beta or running a spread based on some other mechanics (f.ex. cointegration)