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On Mar 3, 4:08pm, Bob Young wrote:
> Subject: Neutral Investing
> Is anyone familiar with the concept of 'Neutral investing', otherwise
> known as 'hedged pairs'? This is a stock investment strategy
> involving the selection of a pair of stocks in the same industry
> gorup. My understanding is that one searches for the most undervalued
> and the most overvalued stocks in that group, and then buys the
> undervalued one and sells short the overvalued one
[snip}
Example:
undevalued: NOVL
overvalued: MSFT
Any questions? :)
Seriously, I think the criteria have to be a bit more sophisticated
than that. One aproach I've seen described is to rank a list of stocks
(let's say you use the 500 stocks in the S&P 500, as your universe),
based upon their performance (a simple measure would be percentage
change over the past 6 months), and buy the N stocks at the bottom of
the list, and short the N stocks at the top, in equal dollar
percentages (the weighting might also be a function of relative
volatility/correlation). You'd rebalance, say, once a month. One
research study I read, recommended doing things in completely the
opposite way: going long the top N stocks and shorting the bottom (a
trend following, rather than mean reversion approach).
I've tried a few simulations of variations on the above
simple systems, and after taking out costs for commissions
and slippage, found it difficult to make money on either of
the above variations of this admittedly simple system.
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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