Pairs Trading is a market-neutral investment strategy that involves simultaneously taking a long position in one asset and a short position in a closely correlated asset, betting that the price divergence between the two will revert to its historical mean. Common pairs in Indian markets include stocks in the same sector (e.g., HDFC Bank vs. ICICI Bank). The strategy is designed to generate returns regardless of the overall market direction, making it popular among quantitative hedge funds and arbitrage-focused portfolio managers.
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