Pairs Trading

Pairs Trading

We have recently highlighted a few market neutral, pairs trades for our clients, so I thought a recap might be required.

A pairs trade is a trading strategy that involves matching a long position with a short position in two instruments (stocks, commodities, inidces etc) with a high correlation.

It is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the under-performing one, betting that the “spread” between the two would eventually converge.

The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on.

On the local market, recent  examples of pair #TradeAlerts include:

Long Shoprite/Short Woolworths

Long Anglo American/Short Sasol

Unum offers a pairs Micro Fund which trades our local and offshore pairs #TradeAlerts

 

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