Relative Value

Relative value refers to the worth of an asset or security compared to another asset or a benchmark, rather than its absolute value. This concept is often used in fixed-income and hedge fund strategies to identify pricing inefficiencies between securities with similar characteristics. Investors who focus on relative value seek to exploit these inefficiencies by buying undervalued assets and selling overvalued ones, aiming for profits as the market corrects the price differences.

Example

A bond trader identifies a relative value opportunity by comparing two corporate bonds with similar maturities but different yields, choosing to buy the undervalued bond with a higher yield.

Key points

• Compares the worth of an asset relative to another asset or benchmark.

• Used to identify pricing inefficiencies in securities with similar characteristics.

• Common in fixed-income and hedge fund strategies.

Quick Answers to Curious Questions

How do investors use relative value strategies?

They seek to profit by buying undervalued assets and selling overvalued ones, expecting the price differences to correct over time.

Why is relative value important in bond markets?

It helps traders identify opportunities by comparing bonds with similar characteristics, like maturity or credit rating, to find pricing inefficiencies.