Well, look at pairs. It's simple. It worked for a long time. In Risk arb, going long the target and short the aquirer made a boatload in many years. In convertible bond arbitrage, going long the convert, shorting the equity with the appropriate ratio, gave you a sharpe>2 for many decades. The list is long, but many strategies generate Sharpes well above the S&P500. The trick is to see them before they become too well known. 

There isn't any underlying theory or locked-in relationship that demands that the pairs remain equally correlated even over short horizons, so I'm wondering if this qualifies as an arb in the true sense of taking immediate advantage of a pricing discrepancy as per the Law of One Price. That isn't to say that the correlations aren't real, but the magnitude varies and you're clearly taking on risk. 

I was thinking about this today, if stat arbs are losing big, someone has to be winning big at their expense - presumably the more complicated models designed to take advantage of stat arb programs in times of high volatility? 

Yes, value has not evaporated, just changed hands. How? I suspect technology: better programs, run on faster machines in concert with Direct Market Access. 

The Street.com reports that Goldman has put in $2bn of the funds itself to GES, which was valued at $3.6bn at the end of last week. What happened to the $3.6bn? In whose hands it ended? Could it be that somebody figured out how to exploit GES and other fund's algorithms? They were (are?) all using the same ideas & systems. 

Value certainly can evaporate due to the nature of bubbles.

Let's say the price of asset x is jointly assumed to be p(x) = A + d where A is the intrinsic value we agree on and d is the known discounted value of future dividends. As long as we share a common valuation of A and d the price is stable. If we all wake up one morning and decide the new value of A is 1/2 the old A then the total wealth of the society will fall.


Closing prices are the prices at which trades occur, but as the M&A business shows, the price for all or a big chunk of shares is often very different.

I expect we'll find that this market turmoil had many winners and losers but that the dollars lost by the losers is far greater than the amount won by the winners, and transaction costs will be too small to explain the difference 

Say on August 1st., 2007, total stock market capitalization was A, and on August 13th., 2007 it was A again. We have heard that some hedge funds are big losers. Excluding those living off transaction costs, who are the winners? And if losers lost because of their stat arb sys went wrong, how did the winners win?