Wednesday, February 15, 2012

Playing with intraday pair trading

Chart: Simulated intraday pair trading visualized

I consider a true hedge fund to employ market neutral strategies. Such strategies should be indifferent to the market conditions and not correlated with market performance.

Market neutral strategies usually employ statistical arbitrage. This mainly means two things: 

1) trades generate positive returns ON AVERAGE, 

2) trades usually have at least TWO OPPOSITE LEGS, such as long position in an undervalued asset and short position in the overvalued asset.

A classical example of such statistical market neutral strategy is pair trading.

Pair trading is a simple strategy in principle. But you can implement it in very many different ways.

And the devil and the returns are in the details... :)

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