This strategy aims at balancing long and short positions in a particular equity market to create a portfolio that, properly structured, has no material net market exposure. Relatively undervalued equities are purchased and relatively overvalued equities are sold short. Such a strategy can benefit from relative value discrepancies without assuming stock market risk. This strategy may be driven by fundamental analysis of companies and industry groups, in which case it is referred to as relative value arbitrage; or by historic statistical market price relationships, in which case it is referred to as statistical arbitrage. Relative value or statistical arbitrage that focuses on the relationships between pairs of stocks is also referred to as pairs trading.
