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Arbitrage Investment Strategy

Arbitrage Investment Strategy

Arbitrage Investment Strategy Definition

Arbitrage Investment StrategyArbitrage is a investment approach that aims at exploiting price differentials that exist as a result of market inefficiencies. Arbitrage plays typically involve purchasing a security in one market, while selling an instrument with similar performance characteristics in another market -- earning returns that far exceed the risk incurred.

Arbitrage is a pretty broad term that is tossed around often and technically could describe a wide swath of strategies in the hedge fund industry. You may have heard of convertible arbitrage, index arbitrage, dividend arbitrage or bond arbitrage before. Convertible arbitrage is one of the most popular forms, it is where a hedge fund manager or trader purchases convertible securities, which are usually bonds. They then short a usually preset portion of the equity risk by shorting the underlying equity security. Leverage is often applied within these types of arbitrage portfolios.

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