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The zero-investment portfolio is a financial portfolio that is composed completely or mainly by securities that cumulatively result in a net value of zero. In some instances, economists consider portfolios to be zero-investment portfolios when the resulting net value is almost zero. Generally, an investor will attempt to achieve a zero-investment portfolio for reasons relating to the rules of arbitrage.
To understand the concept behind a zero-investment portfolio, it is necessary to grasp the fundamentals of arbitrage. Essentially, arbitrage is the process of buying certain amounts of securities on one market, while selling the same amount of the same or similar securities on another market. In some instances, the principle of arbitrage is also applied to buying and selling securities of like value on the same market. The point of arbitrage is to minimize the overall risk of losing money, while at the same time taking advantage of opportunities to make money.
As applied to a zero-investment portfolio, the utilization of arbitrage to protect the overall value of the financial portfolio creates a situation where the investor is protected from the shifts in the investment market that can occur without warning. Because the aim of the trading is to maintain the value of the portfolio, gains and losses usually manage to equalize the value. The result of this zero net value will be little to no interest income that is subject to taxes, a high degree of financial safety for the investor, and the potential to consider riskier investments at a later date.
Often, this state of a zero-investment portfolio takes place by carefully buying and shorting equal amounts of securities. This will require the investor to monitor market activity closely, so that the right balance is maintained between the acquisitions for the portfolio and the sale of items already held. Portfolios of this type are ideal for the conservative investor, since they can provide practical experience in selecting securities and learning to watch market indicators without incurring a great deal of risk.
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