Relative Value based strategies are typically “market neutral” strategies, i.e., they seek to neutralize certain market risks by taking offsetting long and short positions in securities (stocks, bonds etc.) with the aid of actual or theoretical relationships. Market neutral-type strategies do not eliminate risk entirely but rather allow managers to minimize unwanted risk and replace it with risk exposures they expect will be compensated. Because relative value strategies are generally dependent on theoretical relationships to generate returns, the stability, or lack there of, in those relationships determines returns.
