A group of investments which, when combined, create a zero net value. Zero-investment portfolios can be achieved by simultaneously purchasing securities and selling equivalent securities. This will achieve lower risk/gains compared to only purchasing or selling the same securities.
Zero-investment portfolios have many uses, including:
1. Reducing taxes, because they generate little or no interest income.
2. Reducing risk by protecting against unexpected shifts in the value of the held securities.
3. Protecting the overall value of the portfolio so that investment can be made at a later date.
4. Determining if the average portfolio returns are statistically different from zero.
For example, if John bought (that is, took a long position) one share of XYZ Corp., he would be fully exposed to the change in value of that stock. If, however, John sold the same stock (that is, took a short position), then any movement up or down would be canceled out. The combination of these two positions creates a zero-investment portfolio.