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TheStreet Open House

Pair Trades and the Search for Absolute Returns

MINNEAPOLIS (Stockpickr) -- Over the past several months, I have offered readers 14 different pair trade combinations for investors interested in generating absolute returns. The general idea with absolute returns is to utilize long and short investments to produce positive results in a portfolio. Investors can theoretically rest easier knowing that capital is preserved while at the same time producing some amount of positive earnings.

So how have my pair trades performed? As one might expect with such a strategy, the results have been mixed. Of the 14 combinations, eight pair trades have done exactly as expected while the other six failed to produce the expected results. Assuming an investor committed $10,000 to each trade beginning on Nov. 8, 2010, the net return of the 14 pair trades was a positive 1.4%.

That might not seem like such a great number, but with respect to the objective of the strategy, the number is quite solid. Remember, the primary goal with an absolute return approach is to reduce risk in your portfolio. During the same period of time, the S&P 500 produced a return of 3.4%.

With such bullishness, it makes sense then that my pair trade recommendations would lag the market. Had the market suffered losses during the period, the long side of the pair trades would have theoretically protected investors. It is interesting to note that one of the absolute return mutual funds that I follow, Quaker Akros Absolute Strategies (AARFX) has lost 4% of its value since Nov. 8, 2010.

Related: 5 Stocks Setting Up to Break Out

Relatively speaking then, my picks have done quite well. My suspicion is that the Akros fund was overly bearish during the period that backfired as stocks continued to power higher. Instead a balanced approach of buying undervalued stocks and shorting over valued stocks was the wisest absolute return approach.

Let's review of some of those pair trades, including what investors should do moving forward with the stocks involved.

   

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