Relative Value
Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the underlying security or the market overall. Hedge fund managers can use various types of analysis to identify price discrepancies in securities, including mathematical, technical or fundamental techniques. Relative value is often used as a synonym for market neutral, as strategies in this category typically have very little or no directional market exposure to the market as a whole. Other relative value sub-strategies include:
- Fixed income arbitrage: exploit pricing inefficiencies between related fixed income securities.
- Equity market neutral: exploits differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, which also creates a hedge against broader market factors.
- Convertible arbitrage: exploit pricing inefficiencies between convertible securities and the corresponding stocks.
- Asset-backed securities (Fixed-Income asset-backed): fixed income arbitrage strategy using asset-backed securities.
- Credit long / short: the same as long / short equity but in credit markets instead of equity markets.
- Statistical arbitrage: identifying pricing inefficiencies between securities through mathematical modeling techniques
- Volatility arbitrage: exploit the change in implied volatility instead of the change in price.
- Yield alternatives: non-fixed income arbitrage strategies based on the yield instead of the price.
- Regulatory arbitrage: the practice of taking advantage of regulatory differences between two or more markets.
- Risk arbitrage: exploiting market discrepancies between acquisition price and stock price
Read more about this topic: Hedge Funds, Strategies
Famous quotes containing the word relative:
“Man may have his opinion as to the relative importance of feeding his body and nourishing his soul, but he is allowed by Nature to have no opinion whatever as to the need for feeding the body before the soul can think of anything but the body’s hunger.”
—George Bernard Shaw (1856–1950)
“And since the average lifetime—the relative longevity—is far greater for memories of poetic sensations than for those of heartbreaks, since the very long time that the grief I felt then because of Gilbert, it has been outlived by the pleasure I feel, whenever I wish to read, as in a sort of sundial, the minutes between twelve fifteen and one o’clock, in the month of May, upon remembering myself chatting ... with Madame Swann under the reflection of a cradle of wisteria.”
—Marcel Proust (1871–1922)