This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Two Pair Trades for Absolute Returns

MINNEAPOLIS (Stockpickr) -- One of the hottest trends in investment management involves the concept of absolute returns. In a volatile market that can swing violently in any direction, absolute returns hold out the promise of protecting capital while making money at the same time.

Wall Street of course is catching on to the trend, with many new mutual funds offering exposure to both the long and short side of the market. Looking at Morningstar's list of top-performing funds over the last three years and you will find absolute return managers at the top of the list.

My question is: Does the promise of absolute returns deliver? Knowing the financial industry as I do, I am naturally skeptical.

>>Also: 3 Stocks Headed for Breakouts

In 2005, I launched a now-defunct publicly traded mutual fund that offered investors an opportunity to buy stocks that were undervalued and sell over valued stocks short. I think I was a bit ahead of my time. My old prospectus and marketing material for the fund read like a playbook of how investors should have been positioned over the last several years. If I'd had the capital to properly incubate the fund, the returns would have been fairly spectacular.

Instead of a fund, I now do all of my money management in the form of writing articles about stocks and making my recommendations in print. I've had a remarkable track record of successful recommendations, including my own personal favorite, "Why It's Okay to Sell."

My approach in obtaining absolute returns includes a concept known as pair trading. With pair trading, investors take a position on the long side and match that position with a short sale of a different position. If both stocks go up, one would expect the long stock to outperform the short stock, and vice versa.

>>Also: 5 Stocks Poised to Rally

For example ,at the beginning of the year I offered five pair trades for 2010. One of the trades was to buy Apple (AAPL) and sell short Palm (PALM). At that time, Apple was rolling out its iPhone, while Palm was struggling to survive. So far this year, Apple has continued its quest for global market domination, while Palm meekly accepted a low-ball buy-out offer from Hewlett-Packard (HPQ).

A portfolio made up of these trades in equal amounts netted investors approximately 3% year to date. That amount falls far short of the near 10% gains in the market, but it does deliver on the promise of absolute returns: make a small gain while protecting capital from downside risk.

>>Also: 5 Top Stock Picks for the Fourth Quarter

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,960.57 -123.23 -0.72%
S&P 500 1,978.34 -9.64 -0.48%
NASDAQ 4,449.5640 -22.5440 -0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs