The Pros and Cons of Pair Trading

1. The Pros and Cons of Pair
Trading
By: Stewart Strawbridge

2. The Pros and Cons of Pair Trading
As a co-founder and managing member of Selkirk Partners, Stewart Strawbridge builds upon a
career in investment and wealth management that began in 2005. Stewart Strawbridge’s ongoing
work with Selkirk concentrates on global long-short equity investments.

3. The Pros and Cons of Pair Trading
Briefly defined, the long/short equity investment strategy involves combining long positions in
stocks that should appreciate with short positions in stocks that are expected to decline. A popular
form of long/short strategy is the “pair trade.”

4. The Pros and Cons of Pair Trading
Investors who employ the pair trade attempt to offset a long-position stock investment with a
comparable short-position in a stock in the same sector. Ideally, investors will accrue a net profit by
selling short an “overpriced” stock that declines while holding on to a long “underpriced” stock as it
appreciates, essentially counting on a regression to the mean phenomenon.

5. The Pros and Cons of Pair Trading
Although the pair trade strategy has proven effective at generating net gains, it also comes with
some risk. MarketWatch contributor Lex Van Dam cautions investors to ensure that their long/short
stock pairs are closely comparable in order to optimize risk management.