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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Cape Blanco who wrote (31291)	8/20/1998 12:18:00 PM
From: Knighty Tin	Read Replies (2) \| Respond to of 132070

Marc, There are three types of paired trades, IMHO. The concept behind them is that you take the market out of the equation and you trade basically on the individual names. It is rarely that clean. However, the most clean are same industry, similar size companies with similar markets. Ford vs. GM or Exxon vs. Texaco come to mind right away. In fact, I made what rep I do have in paired trading with a long Exxon, short Texaco position at a hedge fund in 1984. Your preferred return is for your short to go down and your long to go up, which is what happened in that case. Your more likely good result is for them to both go in the same direction, but for the spread in prices to work your way. For example, the $50 stock you are long goes to $60 while the $70 stock you are short goes to $76. You catch a $4 net spread gain plus an interest rebate on the short sale, less the dividend you had to pay out (the currently lousy dividend yield on the average stock is a paired trader's dream). There are also what I call moderate correlations. Micron Tech and Analog Devices would be an example. Both are chip cos., but they are in different parts of the business. So, some of their moves correlate and some do not. Then there are the nation spreads, long Hong Kong Shanghai Bank, short Citicorp. However, this is just a variation of the industry paired trade with a few extra complications. And the unrelated paired trades, long Incyte Pharmaceuticals, short Amazon.Com. That is the most risk and I rarely do this type. MB