Pairs Trading

"Pairs trading is the simplest possible example of employing a market neutral strategy.
Pairs trading is a market neutral strategy in its most primitive form."

"Explicit pairs trading is an example of a highly qualititive form of equity market-neutral investing. It involves going long on a stock in a specific sector or industry, and pairing that trade specifically with an equal-dollar-value short position in a stock in the same industry or sector. Philosophically, the strategy tries to insulate the portfolio from systematic moves in sectors or industries by being long in the best stock in the industry and shorting the worst. Profit is derived from the difference in price change between the two stocks, rather than from the direction in which each stock moves. Thus, the strategy does not require that the long position go up and the short position go down; a profit can be earned if the long goes up more than the short or the short goes down more than the long."
Nicholas (2000)

Hedge Funds Consistency Index: Statistical Arbitrage Related Scholarly Compositions