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Pairs Trade
Definition
This is a basic long-short trade where a manager is both long and short equal dollar amounts in similar stocks, whether they are in the same industry, sector or are just highly correlated together. This is also known as pairs trading.
Using the term Pairs Trade :
ABC Hedge Fund utilizes pairs trading to reduce its exposure to the market (beta exposure) to near zero, making the fund neutral (aka a market neutral fund) to the broad markets.
Pay Special Attention To :
Pairs trading does not always work. It depends to a large extent on historical correlations holding and nimble trading to quickly exit when these correlations change. It times of market distress, almost all historical correlations change very quickly which will adversely affect this strategy.
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Related terms
Hedge Fund , Long Short Strategy
