Describing Liquid Alts: Arbitrage strategies
Describing Liquid Alts: Arbitrage strategies
Arbitrage strategies attempt to take advantage of price discrepancies between related securities by offsetting long and short positions in economically linked instruments. Merger arbitrage, for example, typically entails buying the stock of a takeover candidate and shorting the acquiring company. Convertible arbitrage tries to exploit mispricing between a firm’s convertible fixed-income securities and its stock. Event-driven strategies aim to capitalize on pricing inefficiencies stemming from major corporate events such as bankruptcy and mergers.
In theory, a true arbitrage opportunity would involve a nearly riskless trade. In practice, however, there are some “relative value” strategies that do result in some risk. Several liquid alternative arbitrage funds invest in a basket of arbitrage strategies with the aim of diversifying these risks. Here again, leverage can vary across funds.
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