Home
Statistical Arbitrage Through Pairs Trading
Strategy Overview
Here’s a video explaining our pairs trading strategy:
Welcome to DevilsPair
Welcome to DevilsPair, your destination for market-neutral trading strategies leveraging statistical relationships between correlated assets. Our specialized approach identifies temporary price divergences between historically related securities, allowing for strategic positions insulated from broader market movements.
Our Strategy at a Glance
Market-Neutral Trading: Medium-term opportunities (3-14 days) with balanced long/short positions for market risk neutralization
Statistical Validation: Rigorous mathematical testing through correlation analysis and cointegration testing
Precision Risk Management: Predefined entry/exit rules with automated position sizing based on historical volatility
Transparency in Performance: Comprehensive metrics including trade-by-trade analysis and risk-adjusted returns
Performance Highlights
Annual Returns (Net of Fees)
13.51%
Average annual return over the past 3 years
Risk-Adjusted Performance
The Pairs Trading Process
Following a structured, data-driven methodology ensures consistency and removes emotional bias from trading decisions.
1. Identify Pairs
- Industry competitors (e.g., XOM/CVX in energy, KO/PEP in beverages)
- Companies with shared supply chains or market exposures
- Securities tracking similar underlying assets (ETF pairs)
- Assets with clear economic linkages (gold miners and gold prices)
2. Measure Correlation
- Calculate Pearson correlation coefficients (target > 0.8)
- Analyze rolling correlation for stability over time
- Test correlation across multiple market conditions
- Examine behavior during market stress periods
3. Test Cointegration
- Augmented Dickey-Fuller (ADF) test for spread stationarity
- Engle-Granger test for cointegrating relationship
- Johansen test for additional validation
- Half-life calculation to estimate mean reversion timeframe
4. Define Trading Rules
- Entry thresholds at 2 standard deviations from mean
- Exit signals calibrated to historical reversion patterns
- Position sizing based on volatility and confidence
- Maximum holding periods aligned with half-life estimates
5. Execute Trades
- Long position in underperforming asset
- Short position in outperforming asset
- Hedged ratio for dollar neutrality
- Execution timing optimized for minimal market impact
6. Close Position
- Primary exit at mean reversion point
- Secondary exits based on time or stop-loss triggers
- Position unwinding to minimize trading costs
- Performance analysis for strategy refinement
Key Advantages
Market Neutrality
Our pairs trading approach creates positions that are largely insulated from broader market movements:
- Balanced long/short exposure
- Low correlation to major indices (0.04 to S&P 500)
- Positive returns in both bull and bear markets
- Protection against market-wide shocks
Statistical Edge
Every trade is based on mathematically validated relationships:
- Rigorous cointegration testing methodology
- Objective, rules-based entry and exit criteria
- Probability-driven position sizing
- Continuous statistical monitoring of active positions
Diversification Benefits
Pairs trading provides genuine diversification in an investment portfolio:
- Performance independent of market direction
- Distinct return pattern from traditional strategies
- Complementary to long-only portfolios
- Particularly valuable during market downturns
Risk Management Focus
Comprehensive risk controls protect capital:
- Position-specific stop-loss levels
- Maximum exposure limits per pair and sector
- Volatility-adjusted position sizing
- Predefined maximum drawdown thresholds