Pairs trading

Quote from colonelangus:

i don't know where you get your misinformation but you seem to appear on every pair related post spewing frothy feces about a strategy that you clearly know nothing about.

maybe it's semantics, but people can make money in true market neutral strategies by having their longs go up more than their shorts or longs go down less than their shorts. what is your definition of "true market neutral," to be long and short the SAME stock?

do you know what systemic risk is? with a portfolio of pairs, systematic risk is neutralized because you have an equal amount of short $ compared with long so if the market tanks (i.e. the market/systemic risk), you should be OK.

just because you know people that have lost lots of money with pairs doesn't mean that some people are not making consistent profits with the strategy. just look at JonnySharpe's thread, a lot of them are making consistent coin and that is just one way to do it.
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You sound like a very frastruated individual and you are insulting another rmember of this forum with language that is not used by educated individuals and socially fit people.

Just explain why is it a fact that market neutral funds were hit so hard when the market collapsed last year.

A five year old knows. You don't. Maybe you should go to a Kindergarten forum and ask your questions there. Others kids with bad mouths like you may be able to help you.

I can only tell you that I feel you have never placed a real trade in your life.

Bad mouth wrote:

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> with a portfolio of pairs, systematic risk is neutralized because you have an equal amount of short $ compared with long so if the market tanks (i.e. the market/systemic risk), you should be OK.

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You have no idea of what you're talking about. Equal amount of short and long $ does not in any way guarantee you will end up with no losses if the market tanks.

I am not going to educated you because you are the kind that does not deserve that.
 
Quote from intradaybill:
Just explain why is it a fact that market neutral funds were hit so hard when the market collapsed last year.
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Because being 'market neutral' is nearly impossible?

You would need to be constantly rebalancing, and have to assume some sort of stationarity in stock-to-stock and stock-to-index relationships.

i.e. you could beta-weight your selections to get market neutral, but you have to make some assumptions that you selected an appropriate time-period to estimate your beta (what is your confidence level?). As well, the beta is really only E(beta) (expected value), so there is an implicit distribution in which the beta can truly be. As we saw in the latest bear move, the only thing that goes up in a bear market is correlation. All of a sudden, stocks that had betas below 1 had betas far above 1.

Again, just because a portfolio is 'market-neutral' by being beta-neutral doesn't mean you aren't exposed to systemic risk...
 
Quote from Corey:

Because being 'market neutral' is nearly impossible?

You would need to be constantly rebalancing, and have to assume some sort of stationarity in stock-to-stock and stock-to-index relationships.

i.e. you could beta-weight your selections to get market neutral, but you have to make some assumptions that you selected an appropriate time-period to estimate your beta (what is your confidence level?). As well, the beta is really only E(beta) (expected value), so there is an implicit distribution in which the beta can truly be. As we saw in the latest bear move, the only thing that goes up in a bear market is correlation. All of a sudden, stocks that had betas below 1 had betas far above 1.

Again, just because a portfolio is 'market-neutral' by being beta-neutral doesn't mean you aren't exposed to systemic risk...
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ok, but what exactly would that mean for a particular spread trade, for example, short ABX (barrick gold)/long EWC (canada etf) ,with a maximum holding period of, say, 10 days? so i have a time stop of 10 days, after that i take the position off . ..

so we are hoping the spread will revert to some mean value, and the mean has become a moving target, i guess that's the risk. or stock go away from other stock and stay there, because this anamoly make reflect the market fundamental. and you hope it go back, but it no go back.

i guess it's true that the catch here is that we want to trade pairs that have correlation, so if they make fall, they do it together. but then again, you are long in one position, and short in the other, so by definition it make protect you.

i'm not talking about portfolio diversification, where, true, a lot of the asset classes, have become very closesly correlated, i.e., fell down together, i'm interested in an individual pairs trade

the black swan can come and kill any trade, but it's rare by definition. i'm talking about small storms in the market
 
Quote from BillySimas:

So you're saying anyone who employs a market neutral strategy is a schmuck then. Brilliant.
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Thank you for the kind comment. Yes, I would agree with this except in the case of option hedgers (premium sellers), who have time decay working on their side. The vast majority of pairs traders though are individuals who can't figure the markets out and think that by trading pairs, they can keep from losing too much. --Good fortune to all !!--Ishmael:)
 
Quote from Corey:

Again, just because a portfolio is 'market-neutral' by being beta-neutral doesn't mean you aren't exposed to systemic risk...
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Well said, I believe that is the point I was trying to make. But you provide a lot of technical information for some cocky idiots here, now they will run to wikipedia to find out what you mean by beta, etc.

These people I mentioned that were devastated with market-neutral strategies just before their collapse they were rebalancing like crazy paying a lot of commissions. They had a nervous breakdown after seeing that the rebalancing did not to anything to save them. Stocks they were long kept going down and stocks they were short went up or remained at the same level. The statistical corellation suddenly changed.

Now they come in forums arguing that their fallacy works by throwing insults at anyone who has reservations about it. Poor souls....

Market-neutral is a fallacy.
 
Quote from Buy1Sell2:

Thank you for the kind comment. Yes, I would agree with this except in the case of option hedgers (premium sellers), who have time decay working on their side. The vast majority of pairs traders though are individuals who can't figure the markets out and think that by trading pairs, they can keep from losing too much. --Good fortune to all !!--Ishmael:)
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Couldn't agree more with you. I was told by one cocky pair trader who made 18% in 2007 that my 8% return on my personal account was a dismal gain and I should not trade because I am wasting my time with directional trading. This cocky idiot lost 55% in 2008 and was liquidated by his clients basically withdrawing whatever was left. I made 4% gain during the same time. Nothing much but I enjoyed the wild ride.
 
the short BAC/long DIA pair is becoming profitable, so i was too early in saying it did not work.

Ernest Chan is probably right when saying that time is a pair trader's friend (when he compares mean reversion, and momentum strategies which he believes are more risky). If you place a hard stop, your loss will be locked in forever once it's hit.

The better approach seems to be a time stop.

The long Novartis/short switzerland etf pair is losing money, but I am going to wait, and I am not risking anything because it's a paper trade.

I wonder if it has anything to do with currency relationships, swiss franc/dollar? Probably not because both instruments are USD-denominated.

I will assign a probability of 50-60% of this pair becoming profitable within the next 5-10 days. It's based on gut feeling alone, not any calculations. If I'm wrong, I'll admit it in this very thread, not that anyone cares :D

But I'm going to keep the trade open for now.
 
Quote from Ms Varima-Garch:

I will assign a probability of 50-60% of this pair becoming profitable within the next 5-10 days. It's based on gut feeling alone, not any calculations. If I'm wrong, I'll admit it in this very thread, not that anyone cares :D

But I'm going to keep the trade open for now.
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I do care. Remember that prior probabilities based on beliefs can be adjusted through a systematic and rigorous way.
 
Quote from Corey:

Because being 'market neutral' is nearly impossible?

You would need to be constantly rebalancing, and have to assume some sort of stationarity in stock-to-stock and stock-to-index relationships.

i.e. you could beta-weight your selections to get market neutral, but you have to make some assumptions that you selected an appropriate time-period to estimate your beta (what is your confidence level?). As well, the beta is really only E(beta) (expected value), so there is an implicit distribution in which the beta can truly be. As we saw in the latest bear move, the only thing that goes up in a bear market is correlation. All of a sudden, stocks that had betas below 1 had betas far above 1.

Again, just because a portfolio is 'market-neutral' by being beta-neutral doesn't mean you aren't exposed to systemic risk...
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are you saying that by having a well considered pair portfolio that you are not mitigating systemic risk? if not, what is your definition of systemic risk?

as for beta, that is just one of the fundamentals used in creating a pair (for those that consider fundamentals) and i am in no way saying that it is an iron clad system. they don't exist, except maybe in the true arb plays with buy/sell programs.

your posts seem well thought out so maybe you can explain why stocks that had betas below 1 went way up when beta is a ratio directly related to the overall market so there are always some below and above "1", right? the stocks go off the volatility richter but so does the market in time so it seems as if the beta should not change. please explain.
 
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