Making a Sector Bet Via the Russells

One of the sales pitches for alternative investments is that they do not rely on a bull market to generate gains. Many strategies, such as long-short, convertible arbitrage and market-neutral, are designed to exploit opportunities derived from the convergence of related assets.

Spread trades are staples in the worlds of futures and options. The rules for long and short positions are symmetric for futures, as they must be if the instruments are to serve their purposes of price discovery and risk management, but they are asymmetric for stocks. A spread involves taking a short position, and this is considered un-American in many quarters. After all, who ever heard of a downtick rule for buying stocks, and can anyone tell me what the circuit breakers are for shutting down the market during a big rally?

Isolating Sectors

If investment gains going forward are going to be tough to realize as some people believe, it may be time for all of us to start trading like a hedge fund. This means working to achieve specific returns through specific trading opportunities and not relying on a bull's tailwind to push you forward. Can we exploit the spread between large-capitalization stocks as represented by the Russell 1000 (RIY) and small-capitalization stocks as represented by the Russell 2000 (RTY) as one of these strategies? ...