Pairs trades are tough. When you are long one stock, ostensibly the strong one, and short another, the weak one, you have taken on the equivalent of the gaming term for parlay. In essence two bets are harder to win than one, hence the better pay off. In the stock market word this strategy is viewed as safer or defensive but in reality it might not be any different from the parlay bet so many of us are familiar with each football season. It’s hard enough to pick one stock’s directional moves, much less two.
This is an interesting excerpt from Bloomberg, “Bear funds have failed to profit from two crashes in a decade, the second of which, from 2007 to 2009, erased $11 trillion in market value and left the Standard & Poor’s 500 Index below where it stood 11 years ago. After surging a record 30 percent in 2008, the funds slumped 34 percent in 2009 and 24 percent the following year as the stock market rebounded, according to Morningstar, which is based in Chicago.
U.S. mutual funds that short, or wager on a decline in stock markets, have on average tumbled at an annual rate of 10 percent over the 10 years through March, the most of 90 strategies tracked by Morningstar. They’ve fallen 13 percent over the past five years. The group includes 42 funds, with active as well as passive strategies, some of which attempt to amplify market gains or losses.”
To learn more about our view on hedging strategies – this is from our Investment Survival Guide. Know what game you are playing -market netural.