Lack of Catalysts = Good Short for Pair Trading?
Let’s say I have two companies that are a good fit for a pair trade. One of the companies is well positioned for a long with a clear catalyst path, and the other has a lack of catalysts but doesn’t seem likely to decline. My intuition suggests that you would still put them together as a pair trade, assuming there are no better alternatives, because you want to hedge the macro and industry related exposure to make an idio bet on the first stock. Although you would want to short a stock you believe to decline, this is still doable. Is this how you all would think about this too?
This is pretty common, its called a funding short.
Did you just realise this now lol?
Good to know. Not in a seat yet but learning
No worries - would have assumed associate 2 would know this, but honestly, the amount of exposure you guys have to HF ways of thinking differs significantly from analyst to analyst, so shouldn't be that surprised.
This is what many of your pairs will look like, especially in a bull market with less divergence (see 2014-2019). A step further is understanding everything is a game of spreads/probabilities. Good risk/reward for me is a long with meaningful asymmetric upside and a short with 55/45 downside tilt.
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