Statistical Arbitrage

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Statistical Arbitrage

In the context of hedge funds, a style of management that employs complex statistical models that try to capture small abnormalities in a security's intraday return.

Arbitrage

An investment practice that attempts to profit from inefficiencies in price by making transactions that offset each other. For example, one may buy a security at a low price and, within a few seconds, re-sell it to a willing buyer at a higher price. Arbitrageurs can keep prices relatively stable as markets try to resist their attempts at price exploitation. Arbitrageurs often use computer programs because their transactions can be complex and occur in rapid succession.
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A proliferation of participation strategies can create a herd behaviour that is sub-optimal, while providing huge opportunities for stat arb players looking to legitimately take advantage of inefficiencies in the market.
If there are too many participation strategies competing and driving a stock price, stealth uses the inverse of a stat arb mean reversion strategy to pull back and wait for the order book to settle down.
He built and managed the original trading desk at the multi-billion dollar hedge fund Millennium Partners in NY, and managed/traded one of the largest Stat Arb portfolios there for 7 years.