Relative value strategies
See also convergence trades.
Relative value strategies are sometimes called market neutral strategies. A trader will go long a certain instrument while going short another instrument in a way that has no net exposure to broad market moves. They are widely used by hedge funds and proprietary traders to profit off of relative mispricings in the market, usually involving inefficiencies in the government bond market. [1]
For example, Long Term Capital Management, who heavily invested in relative value strategies, bought Italian government bonds and sold German Bund futures; buying the less liquid contracts and selling, at the time, the more liquid treasuries. After the hedge fund blew up in 1998, the strategy was shunned by investors. [2]
Recent News[edit]
In August of 2010, Hedge Fund Research released reports that the strategy was gaining popularity again. At the time, the average relative value fund had returns of 5.33 percent and had taken in $10 billion from investors. Experts believe this is due to the massive issuance of bonds by the UK government, fiscal stimulus packages and unusual central bank monetary policies that have caused price inefficiencies. [3]
References[edit]
- ↑ Market Neutral Trading Strategies. Risk Glossary.
- ↑ Lessons from LTCM. Risk Institute.
- ↑ Price anomalies spur return of controversial hedge fund strategy. FT.