Market neutral
A setup built so the market's direction cancels out of the result.
A market-neutral setup is one where the money at risk on the long side matches the money at risk on the short side, so a move of the whole market up or down leaves the result roughly unchanged. Picture two boats tied to the same tide: whichever way the water goes, both rise or fall together, and the only thing that changes is the distance between them. That distance is the bet.
It matters because a long-only backtest in a rising market looks good for the wrong reason. Neutralizing the market is how a test separates selection from drift: if the strategy still earns once the tide is removed, the ranking did something. If it does not, the profits came from the water, not the boat.
Neutral does not mean safe. A market-neutral basket can still lose money on every contract if the ranking is wrong, and the two sides cancel the market's direction, not their own moves. In the logbook, "market neutral" is usually the beginning of the question, not the end of it.
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Where this word comes up
First needed in the log entry H-016 · Collecting the funding rate is not free money. The price eats what the funding pays.
From the same entry: Bet against momentum, Funding rate, Out of sample, Perpetual futures, Sharpe ratio.