Relative Value Arbitrage: An Academic Paper
The relative value arbitrage technique detailed in this paper has yielded 11% per annum. It requires no capital, since the cost of one security is offset by proceeds from short selling a related security. I believe it to be a sound technique, so long as the public does not act on it en masse. In fact the expected return of relative value arbitrage increases as its popularity diminishes.
“Many investors make the mistake of thinking about returns to asset classes as if they were permanent. Returns are not inherent to an asset class; they result from fundamentals of the underlying businesses and the price paid by investors for the related securities. Capital flowing into an asset class can, reflexively, impair the ability of those investing in that asset class to continue to generate the anticipated, historically attractive returns.”
-Seth Klarman
Security Analysis Sixth Edition
Yo Derek, sent you an email about margins of safety, did u get it