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What Hedge Funds Really Do by Tucker Balch, Philip J. Romero

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CHAPTER 3

An Illustrative Hedge Fund Strategy: Arbitrage

After long/short “hedged” trading strategies, the next most common hedge fund strategy is arbitrage. In its original form, arbitrage meant earning a profit by exploiting discrepancies in the price of an identical good in two different markets. For instance, due to a glut of oil in the American Midwest in 2012 and 2013, the price of oil (dollars per barrel) differed in the Brent (North Sea) market from the Texas market, with the Brent price being as much as several dollars per barrel higher. Arbitrageurs could make a profit by buying Texas oil and selling Brent oil. In this sense, all retailers are arbitrageurs; in that, they buy a product from a manufacturer or wholesaler and sell it to ...

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