...but a little bit helps.
If your browser does not display the graphic the full article is here.
...but a little bit helps.
If your browser does not display the graphic the full article is here.
Two competing – but sometimes overlapping – approaches to relative value / pairs
trading are to take either a fundamental ‘signal’ view based on changes
to factors such as the accounts, the economy, the CFO’s penchant for
recognizing revenue early and so on; and the ‘noise’ approach whereby
the trader concentrates on the divergence in value of the instruments
for reasons unrelated to changes in fundamental conditions.
Bloomberg occasionally publish pairs trading ideas in the first category. Like this one for HCN/SPG. One reading suggests that it is really a macroeconomic call using the
pair as a proxy and the 10 year bond yield as a trigger.
Should pragmatism be a consideration, you may wonder how to avoid over-reliance on those analysts forecasts and GDP predictions cited when applying this idea (see prior blog or this from Larry Summers for why this might be a concern). Even the yield differential heralded as an advantage depends on how the trade is set up - money neutral vs beta neutral for example - thus potentially mitigating the joy of the headline.
But onto the history. Taking the 2001
and 2007 recessions as precedents, as the piece does, the trade
would have made 16% over 8 months and 35% over 18 months respectively
(on a dollar neutral basis). Outside of those rather difficult-to-time
periods SPG has outperformed HCN by a wide margin since 2002 (this
is shown on the Indexed Prices & Spread graph below).
- JM Keynes, The General Theory of Employment, Interest and Money, 1936. I forget which page.
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