The pair trading approach to market neutral investing

Stockholm (HedgeNordic) – Based on disciplined stock selection, Andy Kastner and the team behind the Julius Baer (JB) Absolute Return Europe Equity Fund use long /short pair trading as a means to create a portfolio that exhibits low correlation to the overall market, as well as to underlying sectors. In an interview with HedgeNordic, Kastner explains his approach and elaborates on the pair trading investment style.

Together with a team of four portfolio managers, Andy Kastner runs the JB Absolute Return Europe Equity Fund, an absolute return UCITS fund that since its inception in 2010 has generated annual returns of above 4 % to a standard deviation of 2 %. The fund relies on a market neutral pair trading strategy to select its trades. By scanning the universe of developed market European equities, the strategy aims to detect opportunities in the relative value or ”spread” of equities that historically have shown high correlations.

According to Kastner, the pair trading approach is the most efficient way of isolating the stock selection skills of his team without exposing the fund to market or sector-specific risks. ”By using the pair trading approach, we extract value from our stock selection. Instead of trying to time markets, sectors, currencies or even countries, our focus is to remain neutral in all of these aspects. I would say that we are among the strictest in the market neutral space when it comes to hedgeing out beta exposures.” The way the strategy detects opportunities follows a very systematized process: it includes both a quantitative and a qualitative evaluation processes.

”Our potential investment universe is around 100,000 pairs. In order to filter out investment opportunities, we have developed a quantitative screening tool. Our quantitative screening starts on sector level, where we look at operational quality, sector specific valuation criteria as well as momentum indicators. On top of that we employ a fundamental screening involving company visits.”

To read the whole interview in the HedgeNordic Special Report on market neutral strategies, please click here: Market Neutral Strategies 

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About Author

Jonathan Furelid is editor and hedge fund analyst at HedgeNordic. Having a background allocating institutional portfolios of systematic strategies at CTA-specialist RPM Risk & Portfolio Management, Mr. Furelid’s focus areas include sytematic macro and CTAs. Jonathan can be reached at: jonathan@hedgenordic.com

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