FREE ACCESS!
Subscribe for
Free Access
to over 4000+
pages of Profiles and Top
20 Rankings.
No obligation ever.
|
|
|
|
|
|
1.
|
Definition
|
| |
Statistical arbitrage, or StatArb, as opposed
to (deterministic) arbitrage, is related to the statistical mis-pricing
of one or more assets based on the expected value of these assets.
For example, consider a game in which one flips a coin and collects
$1 on heads or pays $0.50 on tails. In any single flip it is
uncertain if one will win or lose money. However, in the statistical
sense, there is an expected value of $1×50% − $0.50×50% = $0.25 for
each flip. According to the law of large numbers, the mean return on
actual flips will approach this expected value as the number of
flips increases. This is precisely the way in which a gambling
casino makes a profit. In other words, statistical arbitrage
conjectures statistical mis-pricings or price relationships that are
true in expectation, in the long run when repeating a trading
strategy.
Contribute to this section by clicking
▲
top
|
|
2.
|
Examples, Types, or
Variations
|
| |
As a
trading strategy, statistical arbitrage is a heavily quantitative
and computational approach to equity trading. It describes a variety
of automated trading systems which commonly make use of data mining,
statistical methods and artificial intelligence techniques. A
popular strategy is pairs trade, in which stocks are put into pairs
by fundamental or market-based similarities. When one stock in a
pair outperforms the other, the poorer performing stock is bought
long with the expectation that it will climb towards its
outperforming partner, the other is sold short. This hedges risk
from whole-market movements.
In recent years, there has been a trend away from simple
pair-trading, and now it is more common for portfolios of stocks to
be 'clustered' by sector and region in offsetting any beta exposure.
After the portfolio is constructed in this manner, it is usually
optimized using risk models like Barra/APT/EMA/Northfield to
constrain or eliminate various risk factors.
Contribute to this section by clicking
▲
top
|
|
3.
|
Formula
|
| |
Attempt
to benefit from pricing inefficiencies that are identified using
mathematical models.
Contribute to this section by clicking
▲
top
|
|
4.
|
Related Terms
|
| |
Contribute to this section by clicking
▲
top
|
|
5.
|
As
Used in the Hedge Fund World
|
| |
Statistical arbitrage has become a major force at both hedge funds
and investment banks. Many bank proprietary operations now center to
varying degrees around statistical arbitrage trading.
Other Resources:
-
PICTET:
Statistical arbitrage strategies are based on the premise
that prices will return to their historical norms. These
strategies are often leveraged in order to enhance returns.
More…
Contribute to this section by clicking
▲
top
|
|
6.
|
Applications
|
| |
Stat Arb
is actually any strategy that is bottom-up, beta-neutral in approach
and uses statistical/econometric techniques in order to provide
signals for execution. Signals are often generated through a
contrarian mean-reversion principle, but can also be formed by
extreme psychological barriers, corporate activity, as well as
short-term momentum. Clearly, this technique only is demonstrably
correct as the amount of trading time approaches infinity, or
alternately, it does not take into consideration what is typically
called "gambler's ruin."
Contribute to this section by clicking
▲
top
|
|
7.
|
Misused & Abused
|
| |
Statistical arbitrage is subject to model weakness as well as
stock-specific risk.
The statistical relationship on which the model is based may be
spurious, or may break down due to changes in the distribution of
returns on the underlying assets. Factors which the model may not be
aware of having exposure to, could become the significant drivers of
price action in the markets, and the inverse applies also.
On a stock-specific level, there is risk of M&A activity or even
default for an individual name. Such an event would immediately end
any historical relationship assumed from empirical statistical
analysis.
Contribute to this section by clicking
▲
top
|
|
8.
|
Additional Sources of Information
|
| |
-
Books
-
News
-
Scholarly Papers
|
Back to Terms
| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
|
|
