Relative-Value Funds

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.

 

RELATED TERMS
  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Equity Market Neutral

    A hedge fund strategy that seeks to exploit differences in stock ...
  3. Interest Rate Gap

    The difference between fixed rate liabilities and fixed rate ...
  4. World Fund

    A mutual fund that invests in securities from several different ...
  5. Cross Hedge

    The act of hedging ones position by taking an offsetting position ...
  6. Hedge Fund Manager

    The individual who oversees and makes decisions about the investments ...
Related Articles
  1. Mutual Funds & ETFs

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  2. Professionals

    How Mutual Fund Managers Pick Stocks

    Learn about how mutual fund managers choose stocks based on the type of funds they manage and the investment goals of the funds' shareholders.
  3. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  4. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  5. Mutual Funds & ETFs

    Hedge Funds: Funds Of Funds

    By Dan BarufaldiFunds of hedge funds are an alternative to investing directly into individual funds. There are advantages and disadvantages to funds of funds, and the benefits to an investor ...
  6. Mutual Funds & ETFs

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
  7. Mutual Funds & ETFs

    How To Invest Like A Hedge Fund

    Hedge funds earn big returns for investors. Find out how they do it and whether you can too.
  8. Investing

    Understanding a Hedge Fund Manager's Worth

    Hedge funds pool investors’ money much like mutual funds. However, they are not as closely regulated as mutual funds, and although their investments may include stocks, bonds and other traditional ...
  9. Mutual Funds & ETFs

    Protect Mutual Funds From a Volatile Market

    Learn about the best ways to invest in mutual funds, including which types of funds are safest, while still protecting your investment from market volatility.
  10. Mutual Funds & ETFs

    Mutual Funds: Different Types Of Funds

    No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means ...
RELATED FAQS
  1. What's the difference between a mutual fund and a hedge fund?

    These two types of investment products have their similarities and differences. First, the similarities: Both mutual funds ... Read Answer >>
  2. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  3. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  4. What does a hedge fund do?

    Read how hedge funds differ from other investment vehicles and how their investment strategies make them unique and potentially ... Read Answer >>
  5. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  6. How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center