Relative value managers apply arbitrage strategies primarily in global equity and bond markets to take advantage of perceived mispricings between similar or related securities.
Relative value spread trade
The underlying principle for all relative value strategies is spread trading. By establishing long positions in undervalued assets and short positions in overvalued assets, relative value managers aim to capture profit opportunities that arise from the changing price relationship between the securities concerned.
Relative value trading involves the use of such instruments as convertible bonds, preferred securities, options, warrants and option-linked securities, sovereign bonds, swap contracts, swaptions, forward contracts, and futures contracts.