DEFINITION of 'Relative-Value Funds'

A hedge fund that seeks to exploit differences in the price or rate of the same or similar securities. The relative value fund trades on gaps, rather than the price of a specific security alone. The relative value fund may take positions if the gap between prices or rates is considered to have reached its peak and is thus expected to shrink, or may take a position in a security if similar securities are experiencing price changes.

BREAKING DOWN 'Relative-Value Funds'

A relative fund manager will take long positions on securities considered undervalued, while taking short positions on securities considered overvalued. Fund managers determine what they consider normal differences in prices or rates by examining historical movements, and take positions that exploit gaps until the normal state is reached.

Relative value funds tend to be lower risk, and perform better in low volatility markets. If markets become volatile, it becomes more difficult to take advantage of relative changes in price,  as investors become more willing to dump certain securities for safer havens.

 

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