Why can execution costs create drawdown in a market-neutral strategy?

Even when a strategy is market-neutral, it can still experience short-term drawdowns due to execution friction.

Common sources include:

• Entering or exiting positions across multiple venues

• Market spreads widening during volatility

• Slippage when building or reducing positions

• Funding, borrowing, or transaction costs

• Rebalancing between hedged positions

These costs are part of the operational reality of arbitrage and hedged strategies. CICADA Finance monitors these factors as part of its risk and execution management process.