Long/short pair trades

[ericd1]

I recently read an article about long/short ETF pair trades. While it sounds interesting, it appears to be more of a market neutral (low volatility) strategy.

 

Any thoughts, or ideas about this strategy in the current market environment?

 

 

 

[twacowfca]

I recently read an article about long/short ETF pair trades. While it sounds interesting, it appears to be more of a market neutral (low volatility) strategy.

 

Any thoughts, or ideas about this strategy in the current market environment?

 

 

 

 

We did a pairs trade during the 2008 2009 market meltdown that was very profitable. This was The Fannie or Freddie common paired with the most underpriced of their many preferred issues.  Analysis of their capital structures suggested that the common was grossly overpriced in relation to the preferred, often by a factor of five, in any scenario in which there would be any recovery by equity holders.  We were in and out of the trade two or three times with great profits.  The main difficulty was that the preferred took a very long time to accumulate and later sell while the common could be sold in a heartbeat.

 

Currently, the common is not so greatly overpriced in relation to the various preferred issues as several months ago.  However, it's still an interesting  speculation because it looks like the government is finally going to take them out of the public arena.  Here's the trade:  Wait to see if the rumor mill suggests that there might be something left for the shareholders when the government may deprivatize them in early 2011.  If this happens, the common of both GSE's will likely run up more than the preferred issues because the common is liquid.  If this happens an interesting trade would then be to short the common and buy an equal dollar amount of the preferred.  if it turns out that there is no recovery for any of the equity holders, the only loss would be the small amount of interest forgone.  If there is anything left for shareholders, the preferred should have a much better recovery than the common.  :)