Introduction

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Hedge funds are always in the media, often seen as mysterious and esoteric.

That is essentially the lack of detailed information on AA hedge funds, which, in fact. To fight against this, I decided to write a short series of articles describes how the strategy long / short equity can be defined.

Long / Short equity hedge funds are generally long for some stocks. And short of another. Some might say the neutral position of the market. This means that for every million books they hold, they will be short one million pounds of another camp. Others may have a long way. For example, maintaining a length of 70%, 30% short portfolio.

The portfolio selection process can be discretionary or systematic. In this first article I will describe the process of fixing the basic price, and go to the technical selection process at a later date.

Product Price

To compare the stock prices on a comparable standard to enable comparison. For example, if XYZ rises by 10% and ABC has increased by 10%, we would probably have a market neutral differential between the two to remain static.

This is usually done by the price at a price “base”, where the exercise price is usually a stock price more recent historical related.

For example, if XYZ closed at 232 last night, we may be the exercise price set at the 232nd Take XYZ opens at 250 the next morning. The price would be rebased 250/232 = 1 07 759.

It is clear that this represents an increase of 7 nights. 759%.

Suppose now that ABC has moved 450-459. With 450 as the exercise price, the new price would be rescaled February 1.

The gap between XYZ and ABC is:

First 07759-1. 02 = 0. 05759

ie. The spread moves to 5%.

Thus, a merchant who had long been spread overnight, the neutral position in the market would have a yield of 5% on par value of its position.

This concept can be extended to baskets of shares. For example, if a trader wanted to trade a market neutral position XYZ against a weighted basket of 50/50 ABC and DEF, which would be distributed rebased:

n (XYZ) – 0 5 n * (ABC) – 0 5 n * (DEF)

where />
n (X) = (price of X) / base price (X)

In essence, these simple methods for the new pricing for tradable goods are defined synthetic. Contrary to common shares, they do not follow lognormal Random walks and do not drive on a baking sheet. However, some believe traders and hedge fund managers to inefficiencies that can be used.

Some of these gaps will be discussed in subsequent articles.