ramzes

oz001 Wrote:
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> According to the CAPM, a zero beta portfolio
> should earn a risk free rate of return. However
> market neutral hedge funds are able to generate
> superior absolute returns. How does that work? Is
> it due to leverage?

There could be other risk factors besides the market. For example, HL or BL (look at Fama-French model). A market-neutral portfolio can collect premiums that are different from the market premium. Then leverage controls exposure to those other risk factors. Does that help?